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March 29, 2010 3:00 am
Companies have sold risky debt in record volumes this year as low interest rates have fuelled investor appetites, even though fears over Greek bonds have disrupted debt markets in recent weeks.
Global issuance of bonds with ratings below investment grade, known as high-yield or "junk", totalled $67.8bn (£45.3bn) at the end of the first quarter - an all-time high for the first three months of the year, according to Thomson Reuters.
The surge in junk bonds has been driven partly by private- equity backed companies refinancing the massive amounts of debt they took on during the buy-out boom of the last decade. These companies aim to pre-empt a so-called "maturity cliff" of largely leveraged buy-out related loans coming due from 2012 to 2014.
"This [refinancing] will be a theme for many years," said John Cokinos, head of high-yield capital markets at Bank of America Merrill Lynch.
Persistently low official rates have driven yield-hungry investors out of money market funds into higher yielding investments such as junk bonds.
Meanwhile, economic growth and receptive capital markets have improved the prospects of lower rated companies. Default rates are expected to drop under 5 per cent this year from a peak of 14 per cent globally in 2009, says Moody's Investors Service.
These conditions have helped junk-bond markets enjoy a year-long rally until a bout of risk aversion last month as Greece struggled with its debt.
Investor sentiment has snapped back quickly, creating demand for more than $30bn in debt sales so far in March, making it at least one of the busiest months ever for this market.
Companies selling bonds in March included Consol Energy, a US coal company, which sold $2.75bn for an acquisition, while Lyondell Chemical issued bonds as it exited bankruptcy. International Lease Finance, the aircraft leasing unit of AIG, also refinanced existing debt.
"The risk trade is back on," said Mark Vaselkiv, high-yield portfolio manager at T Rowe Price.
In the US, junk bond investments have earned a return of nearly 60 per cent over the past 12 months, according to a Bank of America Merrill Lynch index.
But the sharp gains and the wave of supply over the past year have led to warnings that investors are chasing performance and that the rally may run out of steam soon. The torrid pace of issuance follows $176bn last year, the second highest annual tally, Thomson Reuters says.
Official interest rates ultimately are expected to increase, which could mean higher borrowing costs for junk-rated companies, although some bond managers remain optimistic. Economic growth historically favours riskier tiers of the credit markets even as rates rise.
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