High-yield bonds in, leveraged loans out

investmentnews.com:

The high-yield bond market is becoming a favorite of companies that once raised cash using leveraged loans, luring borrowers with lower costs and a wealth of investor demand.

US firms have sold $55 billion of secured notes in the junk-bond market so far in 2023, marking a 17% year-over-year increase, according to CreditSights data. It’s the biggest issuance jump in more than a decade — and an indication that companies are replacing floating-rate debt in the wake of the Federal Reserve’s most-aggressive monetary tightening cycle in decades.

“It’s a good way to balance each of these markets off each other, and honestly, a better cost of capital,” said John Cokinos, global head of leveraged finance at RBC Capital Markets. “You can hedge naturally by just having fixed-rate debt.” 

US policymakers last week raised their benchmark rates for the 11th time since March 2022, with Fed Chair Jerome Powell leaving open the possibility of further hikes to quash inflation. The prospect of higher-for-longer interest rates is likely to propel secured, fixed-rate bonds even further in popularity over the next six to 12 months, said Cokinos. 

For many companies, the math is simple: The average yield for junk bonds is about 8.5%, while it’s roughly 9.8% for loans.

Investors also see a risk in floating rates, if, for example, yields start to float lower. As a result, the loan market has suffered massive outflows from retail funds this year, even despite a recent comeback in demand and a rally in secondary loan prices.

Many of the biggest buyers of leveraged loans — those who bundle them into collateralized loan obligations — are still under increasing pressure to cut back on their purchases as they run out of time to reinvest their money.

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