Should institutional investors be concerned over surge in U.S. corporate bond supply?

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Copyright : alexskopje // 123RFThe increase in U.S. corporate debt issued in the wake of the coronavirus outbreak could be a warning signal to credit investors, according to a recent blog post by MSCI’s Research’s managing director, Andy Sparks, and executive director, Gergely Szalka.

As many companies headed into the current crisis with an already heavy debt burden, new issuances of corporate debt surged when the U.S. Federal Reserve announced it intended to buy corporate bonds and exchange-traded funds. And companies with poorly performing stocks were significant contributors to the increase in new debt issuances, the research found.

“The impact of the coronavirus epidemic on the corporate-bond market was swift and severe,” the blog said. “Between Feb. 19 and the peak on March 23, spreads of the MSCI USD investment grade corporate bond index widened by more than 200 basis points. Spreads tightened just as quickly after the U.S. Treasury Department and Federal Reserve announced the establishment of new facilities to purchase corporate bonds, with a goal of stabilizing the market and providing support for an eventual economic recovery. As of June 26, spreads were 165 basis points, or about 73 basis points higher than just before the onset of the crisis.”

Overall, off the back of these issuances, the outstanding supply of U.S. investment-grade corporate bonds rose by about ten per cent between March 1 and June 26. The escalation may have been bolstered by many corporate motivations, including funding ongoing operations during the crisis and the desire to take advantage of historically low borrowing rates, it noted.

In examining the correlation between companies choosing to issue new debt and their share-price performance, the researchers divided businesses into outperformers, underperformers and severe underperformers in context of the crisis. Outperformers are defined as exceeding returns of the MSCI USA index, while underperformers didn’t exceed the index but had performance higher than negative 30 per cent. Those  suffering more than 30 per cent losses were classified as severe underperformers.

The research found underperformers and severe underperformers collectively accounted for about 68 per cent of the increase in corporate-debt net issuance since March. “The growing debt burden at companies that have underperformed in the equity market may be another potential warning signal for credit investors,” the blog post said.

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