June 10, 2020

Breakingviews: Wall Street takes bond-market largesse to the bank

by Breakingviews.

Bond investors are showing an impressive willingness to help keep companies afloat amid dwindling revenue thanks to coronavirus lockdowns. So far this year firms have raised some $1.1 trillion in the U.S. high-grade bond market alone, almost as much as in all of 2019. Junk-debt issuance is on a tear, too. The largesse – and low rates – leaves buyers and sellers exposed to a slow recovery. But one group has never had it so good: investment bankers.

The conditions are near-perfect for these middlemen to churn out deal after deal – even for companies that don’t seem to need extra cash. Interest rates have plummeted in the wake of the Federal Reserve’s own rate cutting and other stimulus measures taken by both the central bank and Congress, so companies are on a tear. There’s also plenty of money piling up in asset managers’ coffers: Some $63 billion has been added to taxable-bond mutual funds alone since mid-April, according to Refinitiv Lipper. Low currency costs have even made U.S.-denominated corporate debt look attractive to European and Asian investors.

As a result, the three busiest months for high-grade corporate-bond issuance on record are April, May and March this year, with at least $246 billion raised, using Refinitiv data, more than 40% above the next-biggest month, May 2016.

That will lessen executives concerns about having the financial wherewithal to ride out several months of much-reduced or even non-existent revenue. But it creates potential pitfalls for the future. Many companies now have far more leverage, with little certainty of when and by how much income will start flowing again. The longer that takes, the greater the chance of credit downgrades, debt-servicing problems and worse.

Investors are taking on those risks for ever lower returns, too, and for less creditworthy companies: Just under half of investment-grade issuers this year have a triple-B rating. Amazon.com, meanwhile, which has a single-A rating, paid the lowest-ever coupon on three-year debt last week, just two-fifths of a percentage point.

Any concerns about too low returns or too much leverage won’t bother Wall Street. Its bond underwriters are having what is shaping up to be their best year ever. Market leader JPMorgan notched its highest bond fees ever in this year’s first quarter, for example. That record is unlikely to stand for long.


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