January 24, 2013 6:38 pm

Junk bond issuance at record low yields

The “dash for trash” is showing no signs of abating with investors’ insatiable demand for higher yielding securities helping trigger a wave of junk bond sales at the lowest coupons ever recorded.

Tenet Healthcare and Denbury Resources this week became the latest high-yield issuers to sell debt in 2013 with coupons below the 5 per cent threshold, establishing new record lows for bonds maturing in seven years or more and carrying ratings deep into junk territory, according to Standard & Poor’s LCD data.

Companies with fragile balance sheets are capturing such low coupons as investor hunger for the bonds remains high, even as yields carved out new record lows on Wednesday at 5.64 per cent.

Investors are now accepting less in risk premium, or spread over US Treasuries, to hold junk bonds than they were only a few weeks ago. Since the start of the year, the spread has shrunk almost 50 basis points to 4.62 per cent, according to Barclays indices.

“The high-yield debt market continues to move forwards,” said Adrian Miller, director of fixed income strategy at GMP Securities. “While average coupons on the bonds are still closer to 7 per cent, we are going to see an increasing number of companies pushing those rates below the 5 per cent mark.”

In this week’s debt offerings, hospital operator Tenet sold $850m in 4.5 per cent secured notes due 2021, representing an all-time low print for a single B-rated company with maturity of at least seven years.

Meanwhile, the 4.6 per cent coupon on Denbury’s 10.5-year notes became a record low for subordinated paper.

Overall, sales of junk-rated bonds started the year on a strong footing. Almost $21bn worth of the securities was sold by Thursday, up from $12.1bn in the same period last year, according to Dealogic. Average coupons on the new junk bonds stood at 6.8 per cent.

The Federal Reserve’s commitment to support “risk-taking” investment strategies through its quantitative easing programme should lead to continued outperformance in high-yield bonds, according to RBS Securities.

But analysts at the bank note that valuations on the bonds are now “reaching their fair value limits”.

For now, the bet is paying off – so far this month, investors are sitting on a total return of 1.8 per cent from US dollar junk bonds, according to Barclays.

By contrast, investment grade bonds have returned a negative 0.1 per cent.

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