Junk Borrowing Binge Benefits Wall Street Above All
Junk Borrowing Binge Benefits Wall Street Above All
(Bloomberg Gadfly) -- Junk-rated companies are selling loads of debt again.
They're issuing dollar-denominated bonds at the fastest pace this month since October 2012.
This builds on the frenzy in the U.S. leveraged-loan market this year, which is on pace to be the most active ever.
The most obvious interpretation of this borrowing binge is that it fits into the popular narrative of incredibly frothy markets. In that scenario, speculative-grade companies are throwing caution to the wind and packing on leverage at the expense of lenders. Supporting that argument is the reliance of more companies on debt markets to finance leveraged buyouts, locking in historically low rates.
But that narrative is far too simplistic and misses an important point. Junk-rated companies have been able to borrow money cheaply and easily for years, with the exception of a chunk of time in 2014 and 2015 when oil prices took a dive. And interestingly, the total amount of publicly traded speculative-grade debt has actually declined in the U.S. in recent years.
New debt sales have failed to offset the amount of securities that are being upgraded or maturing.
A more accurate view is that the activity in U.S. high-yield debt markets is mostly churn, which may benefit Wall Street most of all. Companies are fortifying their balance sheets to be as resilient as possible in case of an economic downturn or market selloff. Bankers and lawyers are eager to help because their significant fees help pad bank balance sheets.
Indeed, even with a slow start to the year for U.S. junk-bond sales, investment banks have made $10.5 billion in revenue from selling leveraged finance deals so far this year, up from $6.9 billion in 2016; that's the highest level since 2013, according to Dealogic data cited this week by the Financial Times. That doesn't factor in the hefty fees paid to lawyers who scour documents and get paid hundreds of dollars an hour.
A lot of this activity stems from the leveraged-loan market, where companies are renegotiating deals at a record pace to lock in lower rates and looser terms. A record proportion of transactions have removed provisions that allow investors to limit the amount of new debt companies take on in the future. Private equity sponsors have been singularly aggressive in stripping away some of these protections, giving them more flexibility to deal with future issues.
This borrowing spree is certainly problematic for many debt investors. They're getting less money and control over risky companies. But options are limited because the pool of higher-yielding debt is shrinking and many are required to invest money clients give them.
For most of the companies, the borrowings aren't providing obvious longer-term strength except for perhaps more time to improve their business. Adjusted leverage for both investment-grade and speculative-grade issuers is near decade highs, according to S&P Global data. So companies have been boosting debt faster than they have bolstered revenues.
The biggest beneficiary may be the bankers and lawyers who are earning billions of dollars to negotiate and renegotiate deals, creating a distracting churn amid a relatively stagnant backdrop of slow growth and global stimulus.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.