A global debt binge driven by record low borrowing costs has failed to embrace the riskiest US companies, with their issuance falling to the lowest level since the American economy emerged from recession.
Companies with some of the lowest credit ratings have sold less than $12bn of debt in the US this year, the slowest pace since 2009 and a sharp contrast to the reception Wall Street has given the highest quality companies, according to data from Dealogic.
The slump in debt sales from groups rated triple-C plus or lower by S&P Global, Moody’s and Fitch — among the companies most likely to default on their obligations — comes as highly-rated multinationals have never had easier access to credit.
More than $5tn of debt has been sold both by companies and sovereigns so far this year, the busiest on record, as central banks in Europe and Japan pump stimulus through markets in an effort to spur economic activity and rekindle inflation.
Sales by the lowly rated companies — which includes $1bn from Argentine state-owned oil company YPF and $770m from indebted packaging group Ardagh Group — account for less than 6 per cent of overall high-yield debt sales, the lowest level since 2009.
“There is a search for yield but we are late in the cycle so the price for default risk needs to be higher,” said Sherif Hamid, a portfolio manager with AllianceBernstein. “That is a bit of investor discipline and a little bit fear.”
The riskiest part of the market has hit investors already this year. In mid-February, investors owning triple-C paper suffered declines of nearly 9 per cent as debt markets seized up. At the same time, banks across Wall Street were left nursing losses that spiraled into the hundreds of millions of dollars when they were forced to write down leveraged bonds they could not offload from their balance sheets.
As the market has rebounded, the lowly-rated debt has been among the market’s best performing. Triple-C bonds have returned 24 per cent this year, far outpacing the gains from more highly rated junk debt, data from Barclays shows.
The decline in issuance of fresh triple-C rated debt also stems, in part, from the drop off in leveraged buyouts, in which private equity firms fund their takeovers of companies in the debt market. It was a significant source of supply of riskier corporate debt and has not returned to the level seen before the financial crisis.
It is also a measure of investors’ restraint at a time when nearly $13tn of debt trades with a yield below zero.
“The triple-C market, like the market overall, has been bifurcated,” said David Delbos, a portfolio manager with BlackRock. “Higher quality issuers have enjoyed very good [market] access, while for lower quality companies it has been tougher sledding.”
Companies teetering on the edge of default have been cut off, while those viewed as potential survivors have found investors willing to lend, money managers said. Defaults have climbed but remain concentrated in commodity linked sectors. Triple-C rated groups must pay nearly 11 per cent on debt to attract investors, compared to less than 5 per cent for higher quality double-B rated companies.
The concern remains that sudden market turmoil could once again shut the door on debt sales and send wider reverberations through equity markets, which are struggling with five consecutive quarters of earnings declines and high valuations.
“It is very market dependent,” Mr Hamid added. “It doesn’t take a whole lot of volatility to cause the markets to take a step back, particularly for this kind of riskier paper.”
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