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Risky corporate borrowers make hay as yields slide

The combination of rebounding commodity prices and hopes for faster US economic growth under Donald Trump is helping some of the riskiest corporate borrowers secure cheaper financing and underlines investors’ growing stomach for risk.

An expanding list of companies with a triple-C rating — deep within speculative territory — have been able to lock in borrowing costs below 7 per cent, as yields have fallen over the past 10 months.

Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6 per cent. Last February, triple-C paper traded with a yield of 18.57 per cent, according to Bloomberg Barclays Indices. That figure has nearly halved to 9.36 per cent today.

Atotech, a specialty chemicals business that private equity firm Carlyle purchased from France’s Total for $3.2bn last year, secured $425m of debt financing on Wednesday with a yield of 6.25 per cent. The sale follows junk bond offerings earlier this month to finance the buyouts of packaging group Novolex Holdings by Carlyle and healthcare staffing company Team Health by Blackstone that priced with yields below 7 per cent.

“It seems there is insatiable demand for yield,” said Kevin Lorenz, a high yield portfolio manager with TIAA CREF. “Triple-C’s are routinely pricing at 7 per cent or less. The compensation you get paid to take risk is getting narrower and narrower, much like in 1997-98 and 2004-2006.”

Junk bonds had been hammered by the fall in the oil price, touching a nadir in February. The subsequent rally in commodity prices, coupled with Mr Trump’s plans to quicken economic growth, have overshadowed a rise in defaults last year and spurred a rally in high yield debt that is extending into 2017. The lowest quality parts of the market have led the charge.

High yield groups have raised $25bn in the US so far this year — up more than fivefold from 2016 —, including $3.4bn from triple-C rated issuers, according to Dealogic. It marks the greatest haul from triple-C groups at the start of a year since 2011.

The favourable climate for issuers has spread across credit products, with a flood of loan repricings accompanying more than a dozen refinancings of collateralised loan obligations (CLOs) — bonds backed by loans — as managers seek to reissue existing securities at lower borrowing costs.

There have been 13 CLO refinancings so far this year, compared to just one new CLO being issued, according to S&P Global’s LCD.

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