It’s never been cheaper for companies with ‘junk’ credit ratings to borrow money in the US as investors’ voracious appetite for riskier debt drives interest rates down paid on recent bond transactions at record highs.
Health insurance company Centene Corporation became the latest junk-rated issuer to guarantee a cost of borrowing below 3% this week, wiping more than $40 million off its annual interest bill. It raised $2.2 billion with a 2.5% coupon for a 10-year bond.
The cost of borrowing was an all-time low for a 10-year bond issued by homebuilder MDC Holdings on a small $350 million contract in early January. Deutsche Telekom’s U.S. telecoms provider T-Mobile now holds the record for the lowest coupon ever for a junk issuer, according to Refinitiv data, after raising $1 billion via a five-year bond at 2 .25% in January.
Automaker Ford also joined the minus 3% club this week, with its credit finance arm issuing a seven-year bond offering a coupon of 2.9%.
“In our minds, a 3% return is just ridiculous,” said Tom Krasner, co-founder of Concise Capital Management. “We never imagined buying things at 3% yield in our entire career.”
The flurry of deals comes as junk bonds rallied sharply after a pandemic-induced selloff early last year. Yields fell below 4% this week for the first time as the price of debt soared, according to an index run by Ice Data Services.
“It’s amazing,” said Stephen Philipson, head of fixed income and capital markets at US Bank. Investor optimism about a vaccine rollout and the reopening of the U.S. economy has boosted corporate growth expectations even among lower-rated issuers, he said.
The Federal Reserve’s historic monetary policy intervention during the coronavirus crisis and its pledge to support markets has given investors the confidence to lend to high-risk borrowers. Falling yields on sovereign and higher-rated debt have also prompted them to stretch the spectrum of credit ratings in search of higher yields.
“Everyone has the same point of view and there is so much money for this rally,” Philipson said. “There is such scope for yield.”
Centene, MDC and T-Mobile are all at the high end of the junk rating scale, with ratings around double B, just one level below the triple B threshold to be considered investment grade.
Still, low borrowing costs are high, lower than what the US government – widely considered one of the safest borrowers in the world – was paying on its 10-year debt at the start of 2019.
The search for higher-yielding assets to generate better returns has even caused yields on triple-C-rated bonds to fall to an all-time low of just over 7% this month.
Some bankers and investors have raised concerns that the low cost of borrowing offers little compensation to investors, if the reopening of the US economy takes longer than expected or does not produce the hoped-for growth spurt. . This could limit corporate profits and put pressure on companies’ ability to service their debts, driving down bond prices.
“It all comes down to the Fed intervening in the market at an unprecedented level,” said Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors.
“It gives investors the feeling that they can buy with impunity. The Fed effectively puts a floor under the prices of everything it buys right now. »