NEW YORK (Reuters) – Issuance of investment-grade corporate debt in April so far has hit $203.4 billion, slightly below March’s record, buoyed by the Federal Reserve’s unprecedented intervention into credit markets to blunt the economic effects of the coronavirus pandemic.
A record-breaking $234.7 billion was issued in March, according to Refinitiv data, as the shutdown of the U.S. economy left many businesses in dire need of cash. The borrowing slowed slightly in April as companies headed into earnings season.
On Wednesday, Fed Chair Jerome Powell said the central bank’s programs have helped restore confidence in markets and allowed companies to secure more private financing. The remarks were made during a news conference after the bank’s two-day policy meeting, the first since its emergency sessions in March and April.
In an effort to maintain market liquidity, the Fed has pledged to buy investment-grade bonds as well as select high-yield bonds and shares in some high-yield bond exchange-traded funds. That is in addition to the more than $1.2 trillion in loans pledged in the Treasury Department’s Payroll Protection Program for small businesses and its Main Street Lending Program for larger companies.
“The reason why U.S. investment grade companies are able to issue at such scale is primarily that the Fed announced plans to buy corporate bonds in the primary and secondary markets. That turned everyone else into a buyer – before the Fed has bought a single bond,” Hans Mikkelsen, head of high grade credit strategy at Bank of America, wrote, ahead of Powell’s remarks.
The investment-grade debt market is the chief beneficiary of the Fed’s stimulus efforts, but high-yield debt issuance has risen as well. There have been $33 billion worth of junk bonds issued in April thus far, compared to $3.5 billion in March and $16 billion in April last year, according to Refinitiv IFR and SIFMA data.
The stimulus efforts have helped buoy issuers’ ability to raise capital in more particular ways as well. Companies from SeaWorld <SEAS.N> to MGM Resorts <MGM.N> have sweetened recent bond offerings by including clauses contingent on receiving U.S. stimulus funds.
With an urgent need for cash, these companies have added extra incentives on top of hefty premiums – up to 10.5% – in order to get deals done.
Iron ore miner Cleveland-Cliffs <CLF.N> on April 15 issued a bond with a then-new provision saying it could buy out 35% of the debt early at the price of 103% of the principal, if it received CARES Act loans or any other virus-related government stimulus.
Movie theater chain AMC Entertainment <AMC.N>, car seat manufacturer Adient <ADNT.N>, theme park operator SeaWorld Entertainment and casino and hotels operator MGM Resorts International followed suit, according to public filings and bond offering documents obtained and reviewed by Reuters.
The companies did not respond to requests for comment.
Analysts say the CARES Act provision is mostly good for bondholders: it advertises that a company is vying for stimulus funds, and if received, buys out a portion of credit investors’ holdings. But investors may find their collateral diluted, or see new investors move ahead of them in the capital structure, if the companies get a second or third round of government loans, said Ross Hallock, head of high yield research at Covenant Review.
“The upside is that you get your money back plus a little bit more, so you could potentially capture a quick profit,” Hallock said.
(Reporting by Kate Duguid; editing by Megan Davies, Tom Brown and Leslie Adler)
