FT: Junk bonds, the darling of the debt markets for two years, are proving remarkably resilient.

Globally, triple C-rated companies, which include names such as J Crew, the clothing chain, and Level 3, the communications group, have sold $9.8bn of debt this year, well above the previous year-to-date record of $5.2bn in 2007.

This reflects demand from the continued inflows into mutual funds investing in high-yield corporate bonds, as well as appetite for risk from hedge fund investors. “In general, there used to be pretty strong resistance to accept new issuance from companies that were rated triple C,” said Martin Fridson, global credit strategist at BNP Paribas Asset Management.
A handful of bond sales recently included two features considered particularly risky, according to Standard & Poor’s LCD, which tracks the leveraged finance markets. One of those features was so-called PIK toggle, a popular structure before the financial crisis that gives an issuer the option to pay interest with more bonds rather than in cash. Debt was borrowed, too, to pay special dividends to companies’ owners, in a “dividend deal”. Typically, investors will accept these features from companies with ratings on the higher rungs of the junk category, but all four of these deals were rated triple C.

Bonnie Baha, head of global developed credit at DoubleLine, says there are now more riskier companies than in the past. “If you are just looking at spreads, you can say we still have room to run, but what people fail to recognise is that the credit quality of the relevant credit indices is lower now than it was at the previous low points in credit spreads and that alters the logic,” she says. The days of the junk bull run may be numbered.

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