Looming corporate tax hikes spur demand for leveraged loans.

Issuance of speculative-grade loans to finance dividends hit a record $72 billion in 2021, and there's three months still left to go. Please consider Record Junk-Loan Sales Fuel Dividend Payouts:

"Nonfinancial companies including insurance provider Asurion LLC and fast-food chain Whataburger Inc. have issued more than $72 billion worth of speculative-grade loans to pay dividends in 2021, according to S&P Global Market Intelligence’s LCD. That is already a full-year record in data going back to 2000, topping 2013’s previous high of $54.4 billion. 

"U.S. companies have also issued a record amount of junk bonds this year, while leveraged loan sales are on pace to surpass 2017’s record of $503 billion. After the Federal Reserve cut interest rates to near zero and started buying billions of dollars worth of bonds, many companies were able to lower their interest costs and raise record amounts of cash by selling junk debt, thanks to strong demand from investors in search of higher yields. 

"One major beneficiary of the boom: private equity. Companies owned by private-equity firms have sold over $60 billion worth of leveraged loans to pay dividends—another 21-year record. 

"The largest buyers of junk-rated loans are collateralized loan obligations, which package the debt into securities. Sales of CLOs have set a record this year at more than $124 billion, with analysts expecting them to remain elevated into the year’s end, providing steady demand for new loans. 

"Around three out of every four loans sold in 2021 have had single-B credit ratings. Despite the high volume, the average yield on newly issued, single-B rated corporate debt this year is around 4.8%. That is below the average yield of 5.9% over the past 10 years, suggesting investors aren’t getting paid enough for the extra risks they are taking, according to a recent report by S&P Global Ratings."

Capital Gains Tax and Private Equity

The buyout boom is fueled by easy money and a looming hike in the capital-gains tax. The tax plan also cracks down on alternative investments in IRAs.  A rush is on this year to get things done before the tax changes take effect.

Taking on debt to pay dividends is of course mad, especially with single B-rated companies. I expect many of them will go bankrupt. It happens every cycle. But as long as the junk bond bubble is intact, stock prices have support. Bond bubbles usually break first. It's ironic that Democrat-sponsored tax hikes fueled this final push in junk that is bound to collapse.