The lowest-rated companies in the US are struggling to raise much-needed cash despite a resurgent market for selling bonds, signalling that investors are staying away from borrowers that went into the Covid-19 crisis with the sickliest balance sheets.
Of the $140bn of high-yield or “junk” bonds that have come to market between the beginning of March and Wednesday this week, 57 per cent have been rated double B, or just one notch below investment grade, according to data from Refinitiv. That is up from 42 per cent for the first two months of the year, before coronavirus sparked a sharp sell-off in risky assets.
The highest-quality layer, from issuers rated double B plus, accounted for about 15 per cent of the issuance since March, compared with just 5 per cent in January and February. These are businesses that typically have more leveraged balance sheets than top-rated companies, or perhaps slightly weaker cash flows, but are a long way from going bankrupt.
However, companies lower down the ratings ladder, often highly leveraged and backed by private equity firms, have enjoyed much less support. Debt rated single B minus accounted for about 3 per cent of the high-yield bonds sold since March. That compares to around 10 per cent in January and February, which broadly tracked the previous year.
“The companies that are troubled really have the door closed at the moment,” said Tom Krasner, co-founder of Miami-based investment advisory firm Concise Capital.
“We haven’t seen too many cases where lower-rated issuers have tapped the market,” said Ana Lai, sector lead for capital goods at S&P Global Ratings. “The appetite for risk is fairly limited.”
One example of a company keen for funds is Briggs & Stratton, a century-old maker of lawnmower engines. Analysts note that the Milwaukee-based company needs to refinance a $175m bond that must be paid off in September to avoid triggering an immediate repayment of a separate, and larger, bank loan. But people familiar with the company’s situation say the bond market is currently closed to it.
The company said: “Working closely with our lenders, advisers and other interested parties, we are focused on securing Briggs & Stratton’s future in these challenging economic times.”
But it is running out of options. On June 15 it missed an interest payment, prompting S&P Global to slash the company’s credit rating on the expectation that it will default when its grace period is up next month. The bond’s price has slumped to about 30 cents on the dollar, having traded at par at the start of the year.
The company’s challenge reflects the gap that has opened in debt markets.
Many businesses dashing to raise money to outlast the pandemic have been met by enthusiastic investors willing to lend to them, assured by the Federal Reserve’s backstop of higher-quality companies through its corporate bond-buying programme — part of a series of support measures in March and April that helped to shore up markets. In each of the three months to May, investment-grade companies sold an unprecedented $200bn-plus of bonds.
But other borrowers have been left out in the cold, particularly lower-rated and smaller companies, as investors worry that they will become victims of the downturn. More than 100 US companies have defaulted on their debt so far this year, according to S&P.
Despite the Fed’s support, the rating agency has raised its forecast for the proportion of US companies that will default over the next year as a result of the Covid-induced recession, increasing it to 12.5 per cent last month from 10 per cent in March.
Bankers argue that funding is available, even for the riskiest companies — but not always at a favourable price. They note that in recent weeks, in particular, growing numbers of lower-quality issuers have raised debt.
Meanwhile, lowly-rated, triple C bonds have caught up with the rise of their higher-rated, double B peers since the trough in March.
John McClain, a portfolio manager at Diamond Hill Capital Management, said investors were increasingly willing to buy the debt of lower-rated companies, to avoid missing out on that rally.
“I am seeing a lot of ‘FOMU’ — fear of massively underperforming,” he said.
But analysts and fund managers, and even upbeat bankers, acknowledge that for many businesses, brighter funding conditions may be too little, too late.
“We have been looking bottom-up at our portfolio,” said Alex Veroude, chief investment officer for North America at Insight Investment in New York. He noted that market prices for some of the debt had risen so much since March that the team wondered if it should lower its default forecasts. “But we concluded we shouldn’t. The default wave is not cancelled by the Fed’s activities — it is happening.”