As Companies Scramble to Raise Cash, Even Junk Gets Strong Bid

Mish

Companies are raising cash while they can. It's easy enough to do even for bottom tier junk.

Fed-Sponsored Artifact

A dash for cash is on. In yet another Fed-sponsored artifact, Companies Are Rushing to Borrow Cheaply While They Still Can.

Corporations have sold more than $47 billion of notes in the U.S. through Wednesday, around 60% above the same period in 2019. In Europe, investment-grade and junk bond sales including company and country debt broke a 79 billion-euro ($88 billion) weekly record set a year ago. And in Asia outside Japan, there have been more than $12 billion of sales, a record start for the year.

“Investor demand has been at, or close to, record levels in many instances,” said Lee Cumbes, a managing director in debt capital markets at Barclays Plc in London.

Demand is so strong that even companies with some of the lowest credit ratings, which might have struggled to borrow for much of last year, have been able to tap the market. Transocean Ltd., an offshore oil driller, sold $750 million of junk bonds on Wednesday. The notes carry a Caa1 rating from Moody’s Investors Service, putting them in the lowest tier of debt that companies typically issue. S&P Global Ratings has the securities the equivalent of one step higher at B-.

Bond Ratings

Note that Caa1 is just two steps "above default imminent with little prospect for recovery."

As long as companies can perpetually roll over debt these zombies can stay alive.

As of May, BBB complex has $3 trillion.

I wrote about it on July 17, 2019 in Junk Bond Bubble in Pictures.

Insave Bid for Bonds - 2007 Flashback

While doing a search on this topic I came across this pertinent warning of mine written Sep 29, 2007: An Insane Bid For BBB Rated Bonds.

"But whatever the reason, or whoever is doing the bidding, as long as there is an insane bid for corporate bonds one step above Junk, the stock market is unlikely to crack."

By the way, this setup is very deflationary.

Mike "Mish" Shedlock

Comments (13)
No. 1-7
Stuki
Stuki

Print enough cash, while implicitly promising to "save the system" even when it contains nothing more than zombiefied cardhouses built on negative yield deep junk, and this is what you get: To the extent there is any investment at all, it is largely, and increasingly, of the mal- kind.

nothingbutblueskies
nothingbutblueskies

Could anyone explain in more detail where these investors are getting the cash? Are they borrowing it from the banks at low interest rates?

Scooot
Scooot

I imagine they’re bought by high yield bond funds. Each one having only a small percentage of the worst junk so to speak. Working on the basis they won’t all go bust?

I found this old article about a Transocean issue. https://seekingalpha.com/article/4307005-transocean-bonds-attractive-10_6-current-yield-70-cents-on-dollar

Tony Bennett
Tony Bennett

A Rolling Loan Gathers No Loss

The Game will continue until foie gras debt laden Companies livers, er, cash positions give out and delinquencies / defaults explode.

Enjoy The Calm.

Six000mileyear
Six000mileyear

It looks like today's conditions are about where yields made a short, sharp dip before rocketing into the last recession. Toward the end of the dip, investors took on even more risk as indicated by a continued downward yield trend in riskiest bonds and sideways yield pattern in the safest bonds. What makes things worse this time is the riskiest bonds keep setting new all-time yield lows, but yields of the safest bonds have not make a new lows in several years. This is a major non-confirmation. Once yields on riskiest bonds start heading back up, the recession will be less than 6 months away.

caradoc-again
caradoc-again

There will be a Bush fire equivalent. Tinder keeps building.

Sechel
Sechel

I'm just in shock at the value of my 401k and personal portfolio. I'm in shock that anyone really thinks company equity and debt is worth the market price. I go back to that simple question how much cash flow would you pay to purchase the neighborhood deli, but somehow if that neighborhood deli is publicly traded all bets are off. I first started buying equities where if a company was a 12% grower you would buy it at a p.e. of 12. It was possible. Not these days. I haven't bought a new equity in four years. I can't justify the levels , so even if I like the company the asking price is simply too high.


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