Speculative-grade debt and junk bond-related exchange traded funds are less risky than they appear as many companies have a buffer to mitigate potential shocks.
Over the past month, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) and the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) fell 2.4%. Year-to-date, JNK is up 1.6% and HYG is 0.8% higher. [Taking a Second Look at High-Yield Bond ETFs]
Despite recent concerns over the fixed-income market, speculative-grade bonds are in a better position. The prolonged near-zero interest rate environment has allowed many junk-rated borrowers to sell more bonds at a cheaper financing cost and push out their borrowing, reports Sridhar Natarajan for Bloomberg.
Consequently, Goldman analysts Bridget Bartlett and Spencer Rogers argue that companies with potentially weaker balance sheets are more able to weather external shocks that could threaten their access to capital markets. Specifically, about 75% or $606 billion of the high-yield bonds sold over the past three years have been used to refinance debt at cheaper levels, which has taken a weight off many companies’ debt profiles.
Looking at the amount of debt companies have to payback or refinance in coming years, the five-year so-called maturity wall has been extended by three years. Consequently, now 64% of debt outstanding will start to mature from 2019 to 2023.
“On a notional basis, the near-term debt burden today has doubled over the past three years from $8.5bn due in ≤ 1y in 2012 to $16.3bn coming due in ≤ 1y today,” according to Goldman Sachs. “However, this expansion is symptomatic of the substantial growth of the high-yield market overall, which has risen sharply from $0.92trn in 2012 to $1.45trn today.”
Speculative-grade rated companies have been able to tap into the markets on the heels of record-low borrowing costs and increased high-yield demand. Consequently, Goldman contends that all the refinancing will help speculative-grade companies mitigate potential hiccups down the road, or diminish potential defaults. However, the firm still warned that junk bonds are not completely immune to a weakening environment.
“Barring a recession scenario, this should help mitigate default risk in the high yield market,” Goldman analysts said.
SPDR Barclays High Yield Bond ETF
For more information on speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.