New companies raising cash inflate US junk bond market to record size

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A generation of new entrants to the US junk bond market has propelled it to record size, with early issuers borrowing money cheaply from yield-hungry investors.

A record 149 companies, including cryptocurrency exchange Coinbase and medical supplies maker Medline, have joined the high-yield bond market this year, where lower-rated and riskier companies borrow money from large asset managers, pension funds and other investors, according to the data provider. Optimized commentary and data.

Companies continued a trend sparked by the historic central bank response at the start of the coronavirus pandemic, when they lowered interest rates and started pumping liquidity into financial markets to avoid a more severe slowdown.

Companies eager to raise cheap funds have been encountered by investors desperate to use their cash to work, especially in assets such as corporate bonds that earn more than government debt. As more established debt issuers tapped into the market, bankers turned to new companies to keep the flow going, aided by exceptional buyout activity that created a need to fund acquisitions.

“A lot of these deals are made possible by a very low cost of capital and with that you see more issuers entering the high yield bond market,” said Chris Blum, head of leveraged finance at BNP. Paribas. He added that many companies had also refinanced so-called leveraged loans in favor of high-yield bonds, setting borrowing costs low before they started to rise.

The deluge of issues raised the face value of outstanding debt in the high yield bond market above $ 1.5 billion for the first time, according to a widely tracked index managed by Ice Data Services.

A total of 26 new private issuers entered the market in September, a record matched only once before – in April, according to records dating back to 2005. Already, 13 new issuers were welcomed in October, representing a quarter of the value. notional in dollars. raised on the junk bond market. Online gaming platform Roblox was due to add to the tally on Tuesday, according to people familiar with the deal.

New entrants have already paraded. More than 100 joined in 2013 and 2014, just before a collapse in oil prices upset the market that had funded the growth of the shale energy industry. The only other year to see more than 100 new entrants was 2007, just before the global financial crisis.

This trend has heightened concerns about the widespread availability of capital and increasing corporate debt. The IMF recently warned that increased financial leverage, driven by investors’ search for yield, could “exacerbate existing vulnerabilities” in the financial system.

Investors also noted the challenge of conducting due diligence on the companies they lend to. The work involved in getting to know new issuers, the short time between launching and closing new deals – often just a day – and the sheer volume of debt provided raised concerns.

“Much of this show, like a lot of things we see, is just a by-product of the excess liquidity we have in the system,” said John McClain, portfolio manager at Brandywine Global. Investment Management. “We see excessive amounts of capital chasing returns and trying to find a home. I don’t think it’s going to slow down anytime soon.

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