December 19, 2012 6:50 pm

Record-setting year for corporate debt

Junk bond salesmen are working right up to the last trading days of their record year, as companies take advantage of ultra-low interest rates to lower their borrowing costs and take out insurance against a dive over the US fiscal cliff.

Preliminary figures from Dealogic, released on Wednesday, show global issuance of both high-yield, or junk, bonds and investment grade corporate bonds set records in 2012.

In the US, satellite broadcaster Dish Networks was selling $1bn of junk bonds on Wednesday, two days after Precision Castparts, an aerospace components manufacturer, sold $3bn of investment grade debt – signalling that the market remained open when it might previously have wound down for the Christmas holidays.

In fact, investor demand remained so high for high-yielding assets that junk bond prices reached a new record in some parts of the market this week. The yield on the Barclays US High-Yield Index, which moves inversely to prices, hit an all-time low of 6.07 per cent on Tuesday.

Stephan Jaeger, head of Americas high yield capital markets at Bank of America Merrill Lynch, said it might be time to rename the “high yield” bond market, because he has found investors willing to accept interest rates below 5 per cent.

“They have cash burning a hole in their pockets and they have to put it to work, so that is very good for issuance. I never thought I would be pitching four-handle deals on a daily basis, but it’s a reality these days,” he said.

But 2012 is closing out on a high for bond salesmen, led by JPMorgan, which topped Dealogic’s league table of bookrunners, taking a 6.7 per cent share of the market for global debt capital markets issuance. Deutsche Bank, with 6.3 per cent, was second.

Global investment grade corporate bond issuance was a record $1.71tn in 2012, according to Dealogic’s provisional tally, beating the 2009 record and up 46 per cent from 2011.

Global high-yield issuance reached $419.2bn. The previous record was $351.2bn in 2010.

Merrill Lynch is predicting a modest slowdown in issuance in the early months of 2013, as investors realise they cannot expect a repeat of this year’s strong capital gains and as borrowers pause after having brought forward some of their issuance into December.

Andrew Karp said issuers were citing US budget negotiations, designed to avert a $600bn fiscal cliff of tax hikes and spending cuts, for their decision to tap the market late into December this year.

“Historically investors have shown more receptivity in January,” he said. “Although issuers generally expect a deal, they are worried about waiting and concerned about tail risk if they are wrong about that.”

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