Corporations raise $1 trillion in bond market after Fed aid, double 2019 pace

A person wearing a face mask walks along Wall Street after further cases of coronavirus were confirmed in New York, March 6, 2020.

Andrew Kelly | Reuters

Corporations, borrowing at more than twice last year’s pace, have already raised more than $1 trillion in 2020 as they race to restructure older debt, pay down bank lines and raise cash to weather the recession.

With another roughly $39.2 billion in investment-grade issuance for the week, the total for the year crossed the trillion dollar threshold this week, according to Credit Flow Research. That’s about double the amount raised at this time last year.

Of the $1.038 trillion in new issuance, $706.9 billion of new debt rolled out in the nine weeks since the Fed announced it would support the corporate bond market on March 23. Credit Flow Research said there has also been roughly $160 billion in high-yield deals.

“Interest rates are low and even though the spreads they’re paying are higher than they were paying in February, it’s still long-term cheap money,” said Andrew Brenner of National Alliance. Companies have been restructuring debt, terming out credit lines and raising cash to protect against shortfalls.

“You really don’t know if a second wave [of the virus] is coming or how the economy is going to bounce,” Brenner said. “You know it’s not going to be V-shaped for hotels. You know it’s not going to be V-shaped for airlines.” 

According to Credit Flow Research, there has also been about $160 billion of high-yield debt deals so far this year.

 Foreign investors looking for yield and domestic institutions and individuals have been steady buyers of corporate debt.  For the week ended Wednesday, investment-grade bond funds took in $7.5 billion. High-yield bond funds are in high demand and had their third best week ever, taking in $6.3 billion, according to Refinitiv Lipper data. The best two weeks for inflows were in April.  

“People are willing to buy new issue corporates,” Brenner said. “A lot of money is coming from overseas because of the way the dollar hedges are working right now.” 

Since the Fed stepped in to unfreeze markets, the spread on investment-grade debt has come down to about 180 basis points over Treasurys, about half of where it was when credit markets seized up in February and March. Companies of all grades and sizes have come into the market, including Boeing, which was able to issue $25 billion. That was more than Boeing initially sought and helped it sidestep government aid.

Recent offerings came from Macy’s, Applied Materials, Citigroup, Kellogg, Wells Fargo, Tencent Holdings and Stryker.

“The Fed backstop of risk to insure against the worst-case-scenario credit crisis has provided incredible liquidity to corporate America,” wrote Tony Dwyer, chief market strategist at Canaccord Genuity. The Fed began its corporate bond purchases through ETFs last week and reported that it holds $3 billion on its balance sheet.

 “Despite the gyrations of the equity market, the corporate bond market has seen a steady bid every day since the Fed started buying corporate bonds last week,” Dwyer noted.

Buyer Beware

S&P Global said this week the number of potential debt downgrades is at an all-time high. The warning does not mean a company will be downgraded, but when a debt rating is cut, it can mean it becomes more expensive to issue debt and yields go higher. Yields move opposite price.

 S&P said there are now 1,287 issuers on the potential downgrade list, including some with the highest AAA rating. They either have negative outlooks or ratings on CreditWatch with negative implications. The number surpassed the previous record of 1,028  from April 2009.

 The ratings agency said it added 550 issuers since March, including 490 that face direct economic impact from the pandemic, mostly from financial institutions, consumer products and utilities. It also removed 123 issuers from its list, with 110 of those downgraded. 

In the last month, the ratings of 247 issues from the list were lowered and 134 of those continue to be on the list for potential downgrade. About 64% of those on the list for potential downgrade have risk from the impact of Covid-related containment measures to their operations.

 “Generally, we expect heavy credit erosion in coming months as issuers, especially those in the lower-rated spectrum come under heavy fire from poor earnings, continued difficulties in managing cost structures, and market volatility creating limited funding opportunities,” Sudeep Kesh, head of S&P Global Credit Markets Research, said in a statement.

–CNBC’s Michael Bloom contributed to this story

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