Corporate Bond-Buying Binge Sets Record, And Raises Eyebrows

Companies around the world are racing to sell a record volume--trillions of dollars worth--of relatively cheap bonds as they take advantage of investors' voracious appetite for corporate debt and repair wounded balance sheets ahead of the holiday slowdown.

"The capital markets have opened up and issuers have raced to it because you never know how long the window will remain open," said Jason Mudrick, of Mudrick Capital Management in New York. The U.K. satellite communications company Inmarsat Plc (ISAT.LN), the American retailer Toys "R" Us Inc. and the Polish broadcaster TVN SA were among the low-rated issuers lining up to sell risky junk bonds this week as cash-rich portfolio managers gladly opened their wallets in pursuit of higher returns.

Equipment rental company United Rentals Inc. (URI) seized the opportunity to stockpile cash by selling $500 million in 10-year bonds earlier this week.

"We didn't have an immediate near-term financing need, but we saw this as an opportunity," company treasurer Irene Moshouris said in a telephone interview. "The market was more open and liquid than it has been in previous months."

Also, many emerging-market governments and companies have already tapped the markets. But more borrowers may be coming. Indeed, investors anticipate that borrowers from London to New York to Asia--such as Brazilian steelmaker Gerdau, Barbadian communications company Columbus International Inc., Singapore's Axis Bank and Indonesian petrochemical company Chandra Asri--could take advantage of favorable market conditions before the year-end lull.

The ease with which companies can sell bonds has some people in the markets worried about how the less-creditworthy issuers will be able to cope when this debt matures in a few years' time.

Investors across the globe have bought more than $2.7 trillion of new corporate bonds so far this year, a record, data provider Dealogic said. That contrasts with less than $1.7 billion in all of 2008, when the financial crisis shut down capital markets.

At first, investors favored debt from higher-rated companies in recession-resistant industries like telecommunications and energy. But now, flush with cash and eager to increase returns, they're buying new bonds from casino operators, homebuilders, airlines and other companies that most had given up for dead, and as such, were locked out of the capital markets just a few months ago.

This reborn appetite for risk comes at an opportune time for below-investment-grade borrowers. About $1.4 trillion of bonds and loans from these weaker companies is due to mature in the next five years, according to Dominic DiNapoli, the chief operating officer of FTI Consulting, a business advisory firm.

Buyers of corporate bonds are providing companies like these with a lifeline, by allowing them to push out their debt maturities while banks are still slowly getting back into the business of lending.

Bonds typically offer companies longer maturities than traditional bank loans and tend to have looser terms, giving firms breathing room. But fears are brewing that this eagerness to scoop up bonds is simply postponing a financial reckoning for many companies carrying too much debt.

"Investors are amenable and in some cases have allowed companies which were otherwise heading for bankruptcy to raise money," said James Lee, fixed-income analyst at Calvert Asset Management in Bethesda, Md. "There is a lot of blind faith involved."

So far this year, junk bond issuers--such as casino operators Harrah's and MGM Mirage (MGM), as well as homebuilders Beazer Homes USA (BZH) and Standard Pacific (SPF), and the Irish packaging company Smurfit Kappa Group PLC (SK3.DB)--have used some 75% of proceeds from new deals to refinance existing debt, according to data from Bank Of America Merrill Lynch. That's the highest proportion ever since the firm began keeping records in 1996 and well above the historical average of 52%, according to the bank.

-By Kate Haywood, Dow Jones Newswires; 212-416-2218; kate.haywood@dowjones.com

(Romy Varghese in Philadelphia and Riva Froymovich in New York also contributed to this report.)

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