Companies take advantage of thaw in junk bond market

A number of junk-rated companies took advantage of renewed investor appetite for riskier corporate bonds on Tuesday despite a broad stock market sell-off, borrowing more than $4bn.

The acceleration in issuance signalled to portfolio managers that leveraged finance markets were thawing after a deep freeze at the end of 2018, when bond prices slid and the high-yield market went for 41 days without a fundraising — the longest hiatus the market has experienced since at least 1995, according to data provider Dealogic.

Four companies with sub-investment grade credit ratings borrowed money through US bond markets on Tuesday, according to people with knowledge of the transactions. A fifth group began to market debt to investors.

Demand for the four transactions was so strong that each company was able to borrow more than initially planned, the people said.

“The calendar today was crazy,” said Andrew Forsyth, a portfolio manager at BNP Paribas Asset Management. “We haven’t seen anything like this since early October.”

Power company Vistra Energy raised $1.3bn with an eight-year bond. The company had initially planned on borrowing roughly half that amount, but increased the deal size after investor orders flooded in. The new debt yielded roughly 5.63 per cent, in line with the current average for similarly rated double-B issuers.

Casino real estate owner MGM Growth Properties raised $750m, hospital operator Tenet Healthcare raised $1.5bn and supermarket chain Albertsons raised $600m. Studio City was also marketing a new deal, expected to price next week.

The fears over slowing global growth and expectations of interest rate rises from the Federal Reserve, which caused market turmoil in December, have moderated this year. Fed policymakers have taken a more dovish tone, even as US jobs growth remains strong. The premium that investors have demanded to hold high-yield debt over comparable Treasuries has fallen by more than 100 basis points to 4.35 per cent from a high of 5.43 per cent last month, according to ICE BofAML Indices.

“There are still some things to be worried about,” said Will Smith, a portfolio manager with AllianceBernstein. “But the idea that growth is going to slow massively and the Fed is going to keep tightening . . . that narrative has changed. And given that, [investors] are more comfortable buying leveraged credit now.”

Last week saw bumper inflows to high-yield bond funds, according to data from Lipper. Investors added $3.3bn during the week, the largest inflow since December 2016, which helped drive demand for Tuesday’s deals.

But some bankers and investors cautioned that the market is still just beginning to stabilise. Weak housing data on Tuesday rekindled concerns over the broader economy, while a report from the Financial Times that the US had rejected an offer from Chinese trade negotiators to come to Washington for preparatory trade talks also weighed on the stock market.

Prices on two closely followed high-yield bond exchange traded funds slipped more than 0.5 per cent for the day.

“I wouldn’t say we are in the clear but things feel a lot better,” said one high-yield bond banker. “A number of deals were announced today and I think we’ll see more.”