Thanks to a zero-interest-rate-policy (ZIRP) employed by the Federal Reserve, corporations are borrowing like it’s nobody’s business!
According to Bank of America Global analysts, highly rated companies are borrowing at the fastest pace in a year as new bond issuance has topped $1 trillion in just five months.
Of course, you can thank the Federal Reserve for scooping up corporate debt through the exchange-traded fund (ETF) market.
MarketWatch provides one example:
As an example, AutoNation Inc. AN, a national chain of car dealerships, with credit ratings one step above speculative-grade (or junk-bond) territory at Baa3/BBB-, borrowed $500 million in the bond market Tuesday, just as issuance hit $1 trillion. The company ended up paying a yield of 4.8%, after pricing narrowed by as much as 77 basis points from initial guidance circulated by bankers, according to a person with direct knowledge of the dealings.
AutoNation was one of several public companies that gave back funding from the U.S. Treasury Department’s hallmark $670 billion Paycheck Protection Program, which aims to help small businesses stay float during the pandemic by covering payroll. The Treasury warned earlier in May that the program was not meant for “a public company with substantial market value and access to capital markets.”
Like many of its peers, AutoNation swung to a net loss of $232.3 million in the first-quarter, or $2.58 a share, from net income of $92.0 million, or $1.01 a share, in the year-ago period, as car sales plunged during nationwide shutdowns. Although it reported a slight pickup in late April as more states reopened.
That said, while this is a huge number, it is not entirely surprising anymore. Since the Great Recession, the U.S. corporate bond market has skyrocketed to $9.6 trillion, nearly matching the $10.3 trillion mortgage-backed securities (MBS) market.
But all this may be in vain since they are only borrowing to keep the doors open.
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