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The riskiest borrowers account for the largest share of junk bond transactions since 2007

The riskiest borrowers of US companies have accounted for the largest share of junk-bond sales since 2007 as undersized investors seek yield and bet on an economic recovery.

More than 15 cents of every dollar raised in the U.S. high yield bond market has been sold by groups rated at or below triple C since early 2021, according to a Financial Times analysis of Refinitiv data. This represents the highest share of transactions in a year since the eve of the financial crisis, when weak lending standards sparked a race for weaker companies to borrow money.

The fundraising frenzy by companies with some of the highest default risks highlights the warm conditions in global financial markets.

“Last year, the strongest companies responded to unprecedented events by strengthening their balance sheets in case liquidity was needed,” said Oleg Melentyev, analyst at Bank of America. “Now, we are deeply at the bottom of the barrel when it comes to the weakest and most fragile issuers that can finally finance themselves in this market.

Twenty-one percent of unwanted transactions rated by Moody’s carry one of its lowest labels, according to data from Refinitiv, while that figure is just under 15% for bonds reviewed by S&P Global. The two companies value the vast majority of bonds issued by rotten-rated US borrowers.

Lending boom comes as optimism mounts over U.S. economic growth prospects as country rolls out Covid-19 vaccines and Biden administration pushes for $ 1.9 billion stimulus program.

The Federal Reserve’s unprecedented stimulus measures also lowered interest rates on higher-quality government and corporate bonds, leaving investors looking for riskier bets lower down the rating scale. .

While some investors have become worried about the quality of transactions that have entered the market, many say they feel pressured to lend or face the consequences of underperforming competitors. Others are betting that a big rebound in the US economy will bring a boon to corporate earnings that will boost companies across the rating spectrum.

“The caution that may have been there before is now non-existent,” said Jerry Cudzil, head of credit trading at TCW. “In the short to medium term, you’ll have a hard time keeping up if you don’t buy some of these products. This doesn’t mean that these are good deals. In fact, it’s a good way to lose money in the long run. “

In the past three months, bond sales by triple-C-rated companies have grown at a record pace, Melentyev said. These companies raised $ 3.5 billion in three separate weeks last month, a feat that has only happened seven other times in the past 20 years.

% Line chart showing rally in triple C rated US bonds sends yields to record highs

Retailer Party City, which was struggling even before the pandemic hit, raised an additional $ 750 million last week with a new five-year bond – a stunning reversal from last year when some of the debt of the company were trading at deeply distressed levels below 10 cents on the dollar.

Debt buyout companies have also taken advantage of strong demand to cut back on security checks from the companies they own. Innophos Holdings used a type of risky debt called a payment in kind, which allows it to make interest payments with IOUs instead of cash, to raise $ 175 million. He used that money to pay a dividend to his private equity owner One Rock Capital, who bought the company Last year.

Distressed cruise operator Carnival Corporation, which carries a slightly higher B rating despite half a billion dollars a month while its ships are idle, was able to borrow $ 3.5 billion last week. This is the fifth time the company has exploited the debt markets for liquidity since the pandemic crippled operations last year.

The company found such interest from creditors that it was able to increase the size of the bond by $ 1 billion after it began marketing to investors. He will pay a coupon of 5.75 percent, half of what he had to pay to go into debt last April. This deal – unlike this one – included the company’s ships as collateral in the event that Carnival breached its obligation.

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