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Investors get huge returns from corporate crisis bonds

Investors get huge returns from corporate crisis bonds

Bonds issued by some of the companies hardest hit by the coronavirus have garnered strong over the past year, rewarding investors who were willing to bet on survival.

Carnival Corporation is the cruise operator, once again, the prime example. A year ago, he pawned his boat to lend $ 4 billion to investors who demanded an 11.5 percent interest rate. Now, the yield on these bonds has fallen below 4 percent as bonds increase in value.

Carnival continues to burn $ 600 million a month. The vessels used as collateral for the bond deal are still being shipped while the company waits for the U.S. sea travel ban. But the debt issued by the buyers of these bonds and the film chains and airlines has achieved huge returns in the last 12 months as the economic recovery has taken root.

“It’s amazing,” said Shannon Ward, Capital Group’s portfolio manager, who has invested in multiple bonds issued at the time and is an asset manager who owns nearly 10% of the Carnival bond, according to recent regulatory appearances. “In April last year there were a lot of questions about how these companies could do it. If you were to issue unquestionable bonds, you had to put up a strong coupon. . . It was a very difficult time. “

U.S. high-yield bonds, which are lower than investment levels, returned more than 23 percent to investors in the 12 months to the end of March, more than eliminated the large losses it sold last year. To an index compiled by ICE Data Services.

This is the third time in history that the 12-month return on the market has exceeded 20 percent, according to analysts at Deutsche Bank. The other two periods were in the aftermath of the 2008 global financial crisis and the dotcom boom of the turn of the century.

Investors and analysts have highlighted the historic intervention of the Federal Reserve, which announced on March 23, 2020 that it would take an unprecedented step to help buy corporate bonds in the market by orchestrating the return.

When debt prices began to pick up last year, restaurant group Yum Brands, owners of the KFC and Taco Bell brands, broke the three-week hiatus for high-yield bond sales and raised $ 600 million in a 7.75 percent coupon.

The company was and continues to be among the top performers in the high-performing market, but a wave of restaurant closures prompted it to seek emergency funding.

The bond now trades at about 110 cents a dollar.

ICE BofA high-yield total return index line chart (revised) showing U.S. junk bonds

At the top of the rating ladder, investment firms have begun refinancing bonds issued last year, taking advantage of lower investor demand and borrowing costs.

Kohl created a new debt this week with a 3.4 percent coupon, which will be used to recoup the $ 600 million bond sold last April with a 9.5 percent coupon. The crisis bond has risen to market by 130 cents a dollar, or below 2 percent.

Nordstrom followed a similar move in retail chains last week when it raised $ 675 million to repay a bond from April.

In total, debt at investment levels of more than $ 6 million, more than 80%, is business above $ 100, according to an index conducted by ICE Data Services. The U.S. $ 1.5 billion high-yield bond market is slightly lower with a significant 79 percent.

“It’s a significant change,” said William Smith, a senior U.S. executive at AllianceBernstein. The fund manager holds about 3.6% of the Yum bond. “What central banks and politicians have done is compress the cycle. We had an unprecedented economic downturn – one of the worst recessions we’ve ever seen – and now we’re back. ”

Some still demand caution.

The financing portfolio from last year has increased the set of large corporate debt ratios, increasing refinancing needs and increasing leverage.

Happiness in the economic outlook has also dragged down corporate borrowing costs with an additional return on U.S. treasuries to historic lows in U.S. corporate bonds. This means that the market may suffer from rising interest rates as inflation forces take over. This year has seen one of the worst starts in the investment market and the high yield on bond yields has begun to come under pressure.

Investors have warned that with so many positive expectations in the market, the risk of disappointment (due to falling prices) is high.

“The question mark comes after the euphoria of the tax stimulus is gone,” Smith said.

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