US companies sold almost $32bn of junk bonds in April, marking the biggest month of fundraising by low-rated issuers in three years as support from the Federal Reserve spread through credit markets.
Cash-strapped cinema operator AMC Entertainment, automaker Ford and television streaming giant Netflix were among those to tap the market for cash, following in the footsteps of higher-rated, investment-grade peers that have set issuance records for two consecutive months, according to data provider Refinitiv.
Investors have demanded extra levels of protection when lending to lower-rated borrowers, in view of the likely damage that measures to contain coronavirus will do to companies’ earnings. Close to half of the junk borrowers offered secured debt, pledging assets as collateral in case they are unable to repay their obligations.
“We have been getting paid a lot for uncertainty, even if the virus extends for some time and we see elevated defaults,” said Will Smith, head of high yield at AllianceBernstein in New York. “It has been a pretty good time to be a high-yield investor.”
The rush of fundraising has boosted investment banking revenues for Wall Street banks such as JPMorgan Chase and Bank of America. Together, global banks have earned a record $14.1bn in debt underwriting fees so far this year, according to Refinitiv, helping to offset big losses from other parts of their businesses.
“It has just been a flurry,” said Kevin Loome, a high-yield portfolio manager at T Rowe Price in Philadelphia. “Every day we start work there are multiple deals.”
Analysts said the market has been brought back to life by the US central bank, which has promised to use its powers “forcefully, proactively and aggressively” until the world’s largest economy recovers from the coronavirus shock.
High-yield corporate bonds have returned 3.8 per cent since Yum Brands, the owner of KFC and Taco Bell, broke a near month-long drought of new bond issuance on March 30. That is the best monthly performance since January 2019, figures from Ice Data Services showed.
The $600m bond issued by Yum has soared in value since it priced, and recently traded at 108 cents on the dollar. But gains have been unevenly spread across the asset class, with a $500m bond issued by AMC falling to less than 90 cents on the dollar just a week after the company tapped debt markets. MGM Resorts’ $750m fundraising also fell a little flat, dropping to 97.9 cents on the dollar at the end of the month.
After the US central bank announced it would buy exchange traded funds that own high-yield corporate bonds, investors responded by piling in, lifting assets at two popular ETFs known by their tickers HYG and JNK by more than $6bn collectively.
“Authorities across the world have acted in a fashion that was much more aggressive than was the case in 2008 and 2009 — and much faster,” said Andrzej Skiba, head of US credit at BlueBay Asset Management. “That has helped the market to take more of a constructive stance on asset valuations despite the fact the economy is deeply in recession.”