The Fed Triggered An Insatiable Demand For The Riskiest Corporate Debt

Demand for corporate debt has offered lifelines to struggling firms that can borrow at interest rates once reserved for the safest type of bonds.

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Junk Bond Borrowing Binge

Borrowing Binge Reaches the Riskiest Companies.

Companies such as hospital operator Community Health Systems Inc. and newspaper publisher Gannett Co. have issued a record $139 billion of bonds and loans with below- investment-grade ratings from the start of the year through Feb. 10, according to LCD, a unit of S&P Global Market Intelligence. More than $13 billion of that debt had ratings triple-C or lower—the riskiest tier save for outright default—about twice the previous record pace.

Despite the onslaught of new bonds, riskier companies can now borrow at interest rates once reserved for the safest type of debt.

The most striking aspect of the current lending boom is its timing. Typically, it can take years after recessions for the market to reach its present level of exuberance, analysts said. In this case, it has taken less than 12 months and has arrived just as economic data have revealed a winter slowdown in the recovery.

In recent weeks, three businesses have financed dividends to private shareholders by issuing PIK toggle notes—bonds that give the issuer flexibility to pay interest in additional bonds rather than cash. Such deals are hallmarks of hot credit markets, rising to prominence in the years leading up to the 2008-2009 financial crisis.

“The way the market is viewing this right now is basically saying, if all these triple-Cs can access funding, they’re not going to default,” said Oleg Melentyev, head of U.S. high-yield strategy at BofA Global Research.

The problem, he said, is investors are “hoping that this argument will work longer than it probably will.”

Bond Ratings

Bond Rating Comparison2

Investors are plowing into garbage just above default. 

Q: Why?
A: Fed Triggered Mania

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