Riskiest Borrowers Are Racing to Markets

Borrowers from the low end of the junk spectrum have launched a flurry of bond deals to tap demand from investors keen to lock in higher yields.

About 2 billion euros ($2.41 billion) of triple C-rated debt has launched so far this year, accounting for around a fifth of total high-yield issuance, according to data compiled by Bloomberg. That makes January the busiest period for the rating category since July.

More investors are opting to take on extra debt risk in exchange for more generous returns as progress in vaccination campaigns to fight the coronavirus coupled with central bank stimulus programs hold junk-rated corporate yields at 10-month lows.

Riskiest Borrowers Are Racing to Markets

“I refer to it as investing in the twilight zone,” said Pilar Gomez-Bravo, director of fixed income at MFS Investment Management in London, who manages $6 billion in fixed-income assets. “Valuations are really not attractive anymore, but on the other hand, you have this reality of the market awash with money forcing everyone to take more risks whether they like it or not.”

Read More: European High-Yield Sales Boom Amid Rush for Cash: January Wrap

A 250 million-euro ($300 million) triple C-rated bond from French lab-test firm Biogroup-LCD SCM attracted more than 2.2 billion euros of demand when it priced with a 5% yield last week. That category is four levels above a D rating, which signals default under the debt calibration system used by S&P Global Ratings.

Unattractive Clause

Investors piled into the eight-year notes even though the deal contained an unattractive clause allowing the company to take on more debt before having to pay a change-of-control fee if the owners decide to sell.

The heated market conditions have also spurred the return of deals to fund dividends. Swedish security systems maker Verisure Holding AB set aside about 1.6 billion euros in proceeds from a 4 billion-euro bond and loan transaction to fund a cash distribution to shareholders.

©2021 Bloomberg L.P.

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