Dec 18, 2023 - Economy

Market rally has Wall Street bracing for a refinancing bonanza

Data: ICE BofA Indices via FRED; Chart: Axios Visuals
Data: ICE BofA Indices via FRED; Chart: Axios Visuals

An insurance brokerage called USI borrowed $600 million from investors in the high-yield bond market last week.

Why it matters: It's Wall Street's first bond deal with a "CCC" credit rating since all the way back in April, per Pitchbook LCD. The CCC designation is the worst, most risky rating — and the market for these bonds has been effectively dead.

  • USI's offering is one of the many signals that the overall market's latest upswing has created an opening for companies to refinance debt that's coming due soon.
  • That's key, because a wall of maturities looms over the next few years; as rates soared earlier this year, refinancing wasn't looking so attractive.

What's happening: It's the everything rally. The S&P 500 is surging, and Treasury yields are in free-fall (yields go down as prices go up) since the Fed on Wednesday telegraphed a possible series of rate cuts.

  • In the multi-trillion dollar U.S. corporate bond market, the moves are just as monumental — and it means that all of a sudden, companies can borrow at much lower costs than they could just a few months ago.

State of play: The average yield on CCC bonds plunged by 0.95 percentage points — almost a full point — last week alone. (Check out the steep drop at the very end of the chart above.)

  • Yields here are at their lowest point since August 2022.
  • It's not just the riskiest segment of the market, which is always more prone to large swings — the same trend goes for the rest of the high-yield bond market, too.
  • And even in the more staid investment-grade bond market, where the largest and most credit-worthy U.S. companies borrow (think Apple and Berkshire Hathaway), yields dove by nearly half a percentage point between last Monday and Thursday.

What they're saying: Right now the market is generally open to some CCC deals "because of what happened with the Fed pivoting, and the markets rallying," Rob Cignarella, head of U.S. high-yield strategy at PGIM Fixed Income, tells Axios.

  • "It's a great time for [companies] to try to to take advantage of very positive sentiment and lower yields," says Meghan Robson, head of U.S. credit strategy at BNP Paribas.

But, but, but: Right as the market seems to be heating up, it's going to shut down — no one brings deals during the last two weeks of December.

What to watch: January bond issuance. Right now, there's a huge queue building of companies, especially in the investment-grade space, that plan to launch deals first thing after the New Year, says Robson.

  • As long as nothing happens to upset the rally in the mean time.

Reality check

Yields may be dropping fast, but it's important to note that it's still pretty expensive to borrow compared with a few years ago.

Between the lines: That means that even though the market is thawing to some CCC deals like USI's, it won't be a glide-path for any and every company saddled with those ratings, Cignarella says.

  • USI, for its part, is an example of a higher-credit quality company among the cohort, says Bill Zox, high-yield portfolio manager at Brandywine Global.
  • "Some triple-Cs will still face problems next year," Robson says. BNP is expecting default rates to tick up slightly from where they are now, she adds.
  • Context: The trailing 12-month default rate reached 4.1% in November, in line with the historical average — but much lower than December 2020's 6.6%, and the double-digit levels of the last three recessions.

The bottom line: It's all relative.

  • Even though borrowing is still pretty expensive compared to most of the last decade, the market's current momentum makes it feel like a good time to borrow, especially if you're worried the window might not last. (Similarly, an uptick in refinancing already appears to be playing out in the mortgage market.)
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