Corporations have been on a tear the last few months when it comes to issuing debt. Over the course of the last several months, companies have taken advantage of the Federal Reserve’s low-interest rate policy to keep stockpiling cash. This has even been the case for the “have not” companies of the world, as junk bonds have flying off the shelves.
Should people be worried of collapse? No, according to Moody’s Investor Service. “Notwithstanding worry surrounding the stepped up issuance of high yield debt, a blow-up of the high yield bond market wherein the US default rate swells from September’s 3.6 percent to something well over 7 percent 12 months from now seems unlikely,” Moody’s Capital Markets Research Group Chief Economist John Lonski wrote in a weekly outlook.
The reason is that debt issuance is still only just above half of corporate profits. According to Moody’s even though total operating income of the S&P 500’s member companies slowed down in the second quarter of 2012, “profits from current production still well exceeds total corporate debt issuance — or bond offerings plus leveraged loans. In terms of a moving yearlong sum, total debt issuance now approximates 67 percent of profits.” Moody’s notes that when the trend breaks the other way, that is, when issuance overtakes profits, then a slump usually ensues, as in Q2 1998 and Q4 2006.
So the issuance both for Blue Chip and high-yield will likely continue. In fact, high yield issuance saw a blistering month of September, as investors continue to search for yield in increasingly risky places. According to the Wall Street Journal, which used data from data provider Dealogic, sales of triple-C corporate debt – the lowest rating before default – hit $5.9bn in September. “That made it the second-busiest month on record, after June 2007, and a post-crisis high,” the WSJ said.
High-yield will be boosted by Fed policy, Moody’s notes. “If the Fed follows through on its implicit pledge to keep the US economy flush with liquidity, then the US high yield default rate, as recently predicted, just might now be peaking at October’s prospective 3.9 percent. Indeed, by September 2013, the default rate may be no greater than the currently predicted 3 percent,” Moody’s said.
Although some companies are considering lowering their ratings criteria for investment, starved for yield as they are, it’s pretty unlikely they will allow triple-C. But they may need to think about whether lately beguiling junk will become the competition when they’re thinking of issuing.