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Junk Buyers Desperate for Debt Are Pressing Companies to Borrow

Paula Seligson and Davide Scigliuzzo
·5 min read

(Bloomberg) -- Money managers are having such a tough time getting their hands on debt in the $2.8 trillion market for junk bonds and leveraged loans that they’re calling up companies and pressing them to borrow, instead of waiting for bankers to bring new deals to them.

Investors have driven billions of dollars of these kinds of debt sales this year, including $550 million of bonds from Rackspace Technology Inc. this week, according to people with knowledge of the matter. PetSmart Inc. tried to borrow $4.65 billion in October and failed, but after the junk bond market rallied further after the U.S. election, the retailer found investors beating down its door. It was able to sell bonds and loans in January. Fund managers also pushed US LBM Holdings, a building supply company, to sell notes last month.

The deals typically start with at least one large investor either calling a banker that works with a company, or calling a corporation’s private equity owners directly, and asking for bonds or loans, a process known as a reverse inquiry. Pressing companies to borrow is a role that bankers usually take as they connect corporations and investors.

In a reverse inquiry, the money manager usually promises to buy a certain amount of the debt at a specific price, giving the company more confidence that the transaction will be successful. There’s always some of this activity in the market, but there’s much more happening now, according to bankers, as investors worldwide pile on the risk to gain higher returns in the U.S. and struggle to find enough high-yielding debt to buy.

Many bond offerings have almost sold out before they’re even officially put up for sale. While banks can’t technically make promises to a money manager before starting a debt deal, it’s widely accepted in the market that fund managers that help create a transaction can end up with a larger share of the pie after the process known as allocation.

“Everyone is trying to get a leg up and prove their worth to you so that you will treat them well when allocating a new issue,” said Richard Zogheb, global head of debt capital markets at Citigroup Inc. “We are getting an enormous amount of reverse inquiry.”

Seeking Risk

More than $16.2 trillion of bonds globally carried negative yields as of Thursday, a near record high, as the pandemic continues to drag on interest rates. That’s made investors around the world increasingly eager to buy riskier securities that might pay more yield. In the U.S., January was the third-busiest month ever for junk bond sales, with companies borrowing more than $50 billion thanks to strong demand. It followed a record year for speculative-grade offerings.

Average U.S. junk yields have been driven down to just 4.09% as of Thursday, a record low, according to Bloomberg Barclays index data. That has given companies an incentive to refinance, and to borrow to fund everything from acquisitions to dividend payouts.

But with the economic outlook still uncertain, firms only need so much cash, and there are relatively low levels of acquisitions and buyouts funded by debt. Investors are competing against each other more than usual to get a piece of new deals.

That’s where reverse inquiries can give a money manager a leg up. Investors wanted to buy debt from companies seen as benefiting from the pandemic, and asked for bonds from US LBM, Bloomberg earlier reported. That inquiry helped the company sell $400 million of notes in January whose proceeds will go directly to private equity owners led by Bain Capital LP.

Read more: Bain, CD&R Start Cashing Out Weeks After Buyouts in Junk Frenzy

PetSmart sold $4.65 billion of bonds and loans in January after receiving about $20 billion of demand for the debt. Ten investors had agreed to buy approximately 90% of the sale before the deal was announced, according to one of the people with knowledge. The revived offering, financing the company’s split from online seller Chewy Inc., included a key feature debt buyers had demanded: collateral for the loan and the secured bonds in the form of Chewy shares.

PetSmart didn’t respond to a request for comment. Representatives for Barclays Plc, which led the bond sale, and JPMorgan Chase & Co., which led the loan, declined to comment.

Cheap Debt

Gas drilling company Chesapeake recently sold bonds as part of its exit financing from bankruptcy. The $1 billion deal already had about $2 billion of orders before launching Tuesday, according to the people with knowledge of the transaction. The deal attracted more than $12 billion of orders by the end of the day, which allowed the company to tighten pricing from initial discussions.

Representatives for Chesapeake and Goldman Sachs Group Inc., which led the deal, declined to comment.

Many recent reverse inquiry deals have been refinancings. Money managers initiating deals are aiming to get as big a piece as they can of the transaction.

For example, cloud technology company Rackspace sold a $550 million bond on Tuesday to help refinance its existing leveraged loan, and already had $1 billion of interest from investors before launching the offering, according to other people familiar with the matter. (The company also sold $2.3 billion of loans on Wednesday.)

Representatives for Rackspace and for Citigroup, which led the deal, declined to comment.

Money managers that engage in reverse inquiries often hold the company’s bonds or loans to begin with, and may even own the debt that’s being refinanced. But rolling over a bond into a new security with a lower yield can still be attractive for investors, said Jeffrey Baxter, director of research for leveraged finance at PineBridge Investments.

Baxter said he expects to see more reverse inquiry than usual until acquisition financing activity picks up.

“If you wait for general syndication, your allocations are going to be much worse than the guys who came in early and helped structure and price the deal,” Baxter said.

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