Companies are borrowing in 2020 to break previous records, Goldman says

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Wall Street signs in New York

Mark Lennihan/Associated Press

In August, American companies were supposed to take a break after borrowing huge amounts of debt to help them weather the pandemic.

This does not happen. But why would it be? After all, the August break for Wall Street isn’t exactly what it used to be, with all the COVID-19 quarantine rules for domestic travel and Americans still virtually banned from traveling to Europe.

More importantly, big business accepted the offer of cheap debt, provided in part by pandemic support from the Federal Reserve which kept credit going.

Already in August, the huge chunk of the U.S. high-quality corporate market borrowed more than $117 billion, compared to an average of $95 billion for the same month, over the past five years, according to Goldman Sach data. .

That pushed issuance to a record $1.48 trillion already this year, more than any annual total on record, which Goldman analysts say could easily push volumes above their forecast of 1. $7 trillion for the full year.

“So far, this heavier-than-expected supply has generally been well absorbed, with only modest widening of IG spreads at the index level,” Goldman analysts wrote in a note Thursday evening, adding that the risks “are certainly skewed higher” for their original forecast. .

The closely watched ICE BofA US Corporate Index yield now sits slightly below 2%, after hovering around 4% for much of the past decade and slipping to a record low of 1.87% more early this month.

Thusday, Johnson & Johnson JNJ leveraged its top AAA credit ratings to borrow $7.5 billion in cheap financing for its takeover of Momenta Pharmaceuticals, Inc MNTA.

Its longest 40-year bond price has a yield of around 2.5%.

That’s a better borrowing rate than the average 30-year fixed-rate home loan, which hit a record monthly low of 3.02% in July, according to data from Freddie Mac.

Ultra-low rates haven’t been limited to qualifying homeowners or premium darlings. They have also fueled a borrowing frenzy among the much smaller segment of speculative or “junk-rated” companies, even as BofA Global analysts point out that “weaker names continue to be flushed out”, in a Friday note.

The week saw energy companies Valaris PLC CHAPQ
and Chaparral Energy Inc. CHAPQ
file for bankruptcy, raising speculative-grade corporate bond defaults so far in August to $10.2 billion, according to BofA data.

Additionally, this chart shows how US corporate leverage is also at new highs.

Goldman analysts believe it could be worse, saying that “somewhat surprisingly” corporate balance sheets have only “modestly deteriorated” during the pandemic economic shocks, compared to levels at the end of 2019.

For example, not all debt borrowed by companies ends up hurting their balance sheets, especially since a significant portion of the debt raised since March, via bond issuance, was intended to refinance or repay existing debt, according to Goldman Data.

Major US equity indices were also swept into record highs, with the S&P 500 SPX,
-0.57%
index this week eclipsing its previous high in February, reserving its fastest reversal from bearish territory ever.

Still, some investors see the latest corporate borrowing blitz as a “double-edged sword” and hope that when the pandemic crisis subsides, companies will reduce their debt levels.

There has been a fresh rush of publicly traded companies issuing bonds in recent weeks, pushing this year’s supply to $278 billion – above annual volumes from 2015 to 2019, the data shows. from Goldman.

“At this rate,” the Goldman analyst wrote, “supply is likely to exceed our previous forecast of $300 billion for the full year,” which is why the team has revised its 2020 forecast to $350 billion.

Related: Big banks levy ‘big fees’ on debt and stock underwriting during coronavirus crisis

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