More than 200 junk bonds issued last year are in trouble

(Bloomberg) – In hindsight, it may not have been a good idea to lend hundreds of millions of dollars at rock-bottom interest rates to a losing used-car salesman, to a payday lender or a chain of hospitals in the midst of a pandemic.

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But that’s what happened in 2021 amid insatiable demand for junk bond issuance, and now that the economic outlook is darkening, some of those newly issued notes are trading like debt in difficulty.

More than 220 U.S. dollar-denominated corporate bonds issued last year are trading at spreads greater than 1,000 basis points, according to data from Bloomberg. This is a more dismal performance than the bonds sold before the pandemic: around 150 notes issued in 2019 changed hands at this level, despite a longer trading duration.

Collectively, 2021 issues trade on average at 55 cents on the dollar yielding 13.2%, with average coupons of 7%.

Last year’s excessive optimism and desperate hunt for yield gave way to recession fears, evaporating liquidity and renewed fears of default. These days, the high yield new issue market has almost come to a standstill, save for a handful of leveraged buyouts that banks are desperate to get off their books, a sign of the speed with which which investor sentiment may change.

“The question is ‘Are we going to have a lot of failures? “,” Bob Kricheff, portfolio manager and global strategist at Shenkman Capital Management, said in an interview. “We haven’t been through the cycle long enough to see if we’re making a lot of mistakes in the market, or if these companies can figure out how to get out of it, or if the economy is recovering enough for them to survive. “

While the 16% decline in Bloomberg’s high-yield benchmark year to date has certainly hurt, the steep declines for issuers in the 2021 class also stem from the risky nature of their businesses that have earned them many adverse credit ratings. Some examples:

carvana

The online used-car retailer famous for its car vending machines issued $1.35 billion in unsecured senior notes, including $600 million in March 2021 and another $750 million in August in a backdrop of high used car prices resulting from pandemic supply chain rumblings.

Since then, prices have started to fall. In April, Carvana reported a bigger-than-expected loss and said it would take longer than expected to break even. He later struggled to issue new debt to acquire a car auction business, cut jobs, and was temporarily stripped of his license to sell cars in Illinois. All the while, bonds sold last year have been sinking. Its 2027 bonds now yield over 17%, while its 2029 bonds yield 15.2%.

inotiv

Contract researcher Inotiv Inc. went into debt for the first time in September, with a package including $140 million in convertible bonds. The 3.25% Notes due 2027 would convert to $46 per share. That was within reach in late 2021 when the stock traded at $42, but looks less likely now that shares have fallen to around $10.46 after a grand jury subpoena related to past imports of primates in February. A few months later, the Justice Department alleged animal welfare law violations regarding the treatment of puppies and their mothers at one of its testing centers.

Inotiv did not respond to a question about the allegations. It has since closed the facility involving the dogs as well as a second facility in Ireland. Convertibles can be purchased for 60.75 cents on the dollar, yielding 14%.

Community health systems

The multistate hospital system had made demonstrable progress in repairing its heavily indebted balance sheet before the pandemic. Some of its battered debt had actually exceeded par at the start of 2021, so in May of that year it sold $1.44 billion of second priority preferred bonds due 2030 which pay $6.125 %.

They have since fallen below 60 cents with a 15.9% return as the wider sector grapples with rising labor costs, the recent resurgence of Covid and the prospect of government refunds. lower.

Audacity

Owners of radio stations like Audacy Inc. have also been hit hard by the impact of the pandemic on staying at home, reducing advertising demand. The outlook improved enough in March 2021 to issue $540 million of subordinated notes paying 6.75% for eight years.

Alas, tickets plunged to 53 cents in June as major national advertisers fearing a recession retreated, according to S&P Global Ratings, which downgraded Audacy to CCC+, saying leverage will increase “and may not regain never pre-pandemic levels.”

Issuers win?

Investors who opted out of last year’s new issue rush feel vindicated. Vanguard’s actively managed funds were among them. Michael Chang, a senior portfolio manager who oversees the $7.5 trillion investment firm’s actively managed high-yield funds, said he expects to see an increase in loan defaults over the next 12 to next 24 months.

“We thought a lot of these offerings were basically priced to perfection. These were deals that didn’t have much margin for error or margin of safety,” Chang said.

There is, of course, a silver lining for struggling specialists looking to secure credit at substantial discounts after years of drought, but caution still prevails. Matthew Mish, credit strategist at UBS Group AG, said clients trying to allocate portfolios and find value struggle to come up with “a name story” that can work.

“Everything is based on inflation. Everything is based on the Fed and the evolution of Fed policy. The micro-stories don’t really matter here,” Mish said.

Meanwhile, “it’s worked extremely well for issuers,” said Phil Brendel, who tracks distressed debt at Bloomberg Intelligence. “It was a fantastic way to eliminate all their debt and refinance,” he said. “I certainly don’t think companies feel bad about selling paper.”

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Garland K. Long