The Lemmings March On----Junk-Bond Buyers Persist in Yield Hunt Amid Global Market Spasms


Credit market jitters have done little to deter yield-hungry investors from buying new junk bonds to get their fix.

Consider PDC Energy Inc., an oil explorer with credit ratings four levels below investment grade. Investors were so enthusiastic about the company’s bond sale on Monday that they put in $1.5 billion of orders for a $400 million offering, according to people with knowledge of the matter.

PDC’s hardly alone. Despite Tuesday’s plunge in crude, Callon Petroleum Co. and Great Western Petroleum are planning to raise a combined $650 million of debt this week, said the people, who asked not to be identified because the deals are private. They’re seeking to take advantage of borrowing costs that are hovering near 15-month lows even after the busiest August for sales since 2012.

Buying Opportunity

Junk-bond buyers are showing few signs of panic because for them not much has changed despite cracks in the three main forces that have kept volatility low for much of this year, said Niklas Nordenfelt, a money manager at Wells Capital Management. “One being this notion that rates are low for a very long time, the second being that oil prices have stabilized and the third is that the market has discounted a Clinton victory,” he said.

“This is way too early to be concerned about any of these things materially changing the outlook. Until we see a fundamental change, we think this kind of volatility presents opportunities to buy.”

Nordenfelt said his firm has preferred buying bonds in the secondary market because newly-issued notes are more likely to sink in a selloff. Case in point is packaging company Ardagh Group SA’s $770 million of payment-in-kind toggle notes, which dropped to 98.25 cents on the dollar on Tuesday, down from 100 cents when they were sold last week, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Default Swaps

The cost to protect against defaults by junk-rated North American companies jumped to 415.7 basis points on Tuesday from 387 on Sept. 8 as traders were rattled by doubts that central banks around the world will keep extending their unprecedented stimulus efforts and falling oil prices.

Even so, the risk premium on the measure is far from its year-to-date high of 588.6 basis points in February, when oil prices bottomed. Bank of America Corp. expects new junk bond sales this month to reach $20 billion, after $18.5 billion of the debt was sold in August, according to data compiled by Bloomberg.

“This summer was one of the busiest on recent record for supply volumes across high-yield, investment-grade, and leveraged loans, and we would not be surprised to see that trend continue into the fall,” Bank of America Merrill Lynch strategists led by Michael Contopoulos wrote in a note to clients on Monday.

Still, not every deal has been a knockout. Acelity was forced to pay up on Tuesday to sell $1.75 billion of five-year bonds. The private-equity-backed medical technology company issued the notes at a yield of 9.625 percent, about 0.125 percentage point more than what it initially offered, according to a person familiar with the matter.

“I think the market in general has been reasonably good at discerning between the really hairy, kind of sketchy credits and then everything else,” said John McClain, a portfolio manager at Diamond Hill Capital Management.

Source: Junk-Bond Buyers Persist in Yield Hunt Amid Global Market Spasms

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access