NEW YORK, March 2 U.S. junk bond sales posted their busiest February on record with $15.8 billion of new issuance as sovereign risk fears receded, and more sales are on the way, strategists said.
Eastman Kodak EK.N, GMAC, McClatchy Co (MNI.N) and Reader's Digest Association were among companies taking advantage of renewed appetite for risk as expectations debt-stricken Greece would secure financial aid boosted investor confidence.
High-yield bond sales have surged to records every month since December as companies refinanced debt, getting ahead of a scramble for funding over the next five years when as much as one trillion dollars of junk bonds and loans come due.
December's total of $15.7 billion junk bond sales and January's $16.5 billion total were also records for those months, according to data from high-yield research firm KDP Investment Advisors.
"There's certainly a lot of demand from companies that need to refinance bonds and particularly loans," said KDP president Kingman Penniman. However, the question is whether the market keeps its delicate balance between supply and demand, he said.
"As we saw in the first two weeks of February, when it gets out of kilter you have pressures," Penniman said.
SALES MORE THAN TRIPLE
About six junk bond sales were postponed between late January and the middle of February as Greece's budget crisis raised fears that the global economic recovery could be derailed, prompting a selloff in high-yield bonds.
Prospects of a bailout for Greece, rebounding equity markets and assurances from Federal Reserve Chairman Ben Bernanke that U.S. interest rates would stay low for an extended time have all renewed appetite for risk.
The year-to-date tally of $32.3 billion in junk bond sales is more than triple the $9.5 billion total for the same period in 2009, according to KDP.
With bank lending still tight, the high-yield bond market has been an important source of liquidity that ultimately could be good for the economy, said John Puchalla, senior analyst for Moody's Investors Service.
"At some point the risk in a downturn is always that it continues to perpetuate if companies can't get access to credit, cut staff and things further spiral downward," he said. If companies are able to improve liquidity positions, "then there's less pressure to try to cut costs," he said.
YIELD SPREADS MORE ATTRACTIVE
With the credit markets healing, Moody's is projecting a sharp decline in the high-yield default rate this year, "and people start to get comfortable extending credit to riskier borrowers in that environment," Puchalla said.
The recent pullback in high-yield bonds may have been a plus for issuance because yields rose to more attractive levels for investors, strategists said.
Junk bonds on average yield about 6.66 percentage points more than comparable U.S. Treasuries, up from 5.99 percentage points in mid-January before sovereign risk roiled the market.
"The feeling of the market has been good," said KDP's Penniman. "It's a delicate balance between making sure that the issuer and investor are both being treated fairly."
Even during the record winter storm that hit New York last Friday, high-yield issuers sold $2.57 billion of bonds, according to KDP data, and all of the deals performed well, Penniman said.
That should give other companies more confidence to come to the market, he said.
By refinancing near-term debt with longer-term bonds, companies are giving themselves more breathing room and sometimes earning ratings upgrades in the process.
Liquidity ratings, which reflect a company's cash flow and other sources of liquidity over the next 12 months, have improved significantly since the high-yield bond market began recovering last year, according to Moody's data.
Last month alone, Moody's upgraded 10 liquidity ratings for speculative-grade borrowers and downgraded just one, according Puchalla.
(Reporting by Dena Aubin; Editing by Andrew Hay)