Unprecedented Pace of Corporate Debt Issuance Has Crippled Corporate Fundamentals
The comments below are an edited and abridged synopsis of an article by Tyler Durden
When the Fed breached a monetary taboo last month by buying investment-grade bonds, it was clear that the only way to avoiding bursting the corporate debt bubble was to make it even bigger. The Fed’s backstop of the bond market has meant the supply of IG bonds has set a record pace in 2020.
The Fed’s enabling of this bond bubble burst was aided by Covid-19. It has produced an unprecedented market shock, with IG issuers experiencing a sharp drop in earnings, and no sign of recovery. Through April 20, IG issuers had tapped $134 billion in revolvers, putting bond issuance/revolver draws at $568 billion since the beginning of March.
While trends in the use of those proceeds point to companies using debt issuance to shore up liquidity, the IG issuance momentum has been so powerful that companies have been using corporate bonds to refinance some of the revolver draws in recent weeks.
So while the Fed’s actions have triggered a tidal wave of new corporate debt issuance, one which will make the corporate sector scream for a bailout during the next, even bigger crisis, and the Fed will gladly provide yet again, more interesting is the fact that IG issuance tends to spike before or right at the start of a recession.
As companies flood the market with new debt, they sow the seeds of their own over-levered demise, because while the Fed has made it easy for IG corporations to issue an unprecedented amount of debt, doing so has doomed even the most solid credits to a day of reckoning, one where they will have more debt than ever, assuring another avalanche of downgrades, many straight to junk, either in the current crisis or in the next one, when the Fed will have no choice but to buy all the outstanding corporate debt.