Junk-rated U.S. companies are increasingly taking advantage of yield-hungry investors by issuing notes that require no public financial disclosure.
More than 55 percent, or about $50 billion, of speculative-grade debt securities sold this year were through deals known as private placements for life, borrowings that don’t require any public registration, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data. That’s up from a record 40 percent share of the junk-bond market in 2014.
Investors are being left with little choice but to buy riskier corporate debt after the Federal Reserve reduced its outlook for an interest rate increase in the U.S. and stimulus measures from the European Central Bank pushes yields on more than $1.9 trillion of sovereign debt below zero. That’s weakening creditor protections while allowing borrowers to dictate terms, according to Martin Fridson, a money manager at Lehmann Livian Fridson Advisors LLC.
“Deals are getting worse and worse for the investor, and they have been powerless to stop it,” Fridson, who started his career as a corporate-debt trader in 1976, said in a telephone interview. “Companies value secrecy and don’t want people doing analysis. The more they can keep investors in the dark the better it’s been for them.”
By selling bonds under Securities Act Rule 144a, corporate borrowers can delay filing financial disclosures as long as they sell the notes only to qualified institutional buyers, saving them money otherwise spent on regulatory compliance.
Notes sold as 144a-for-life avoid those requirements completely.
Sensata Technologies Holding NV, a Dutch manufacturer of sensors, sold $700 million of bonds on March 19 as so-called 144a-for-life debt, according to data compiled by Bloomberg. Murray Energy Corp., a St. Clairsville, Ohio-based coal miner, may sell $1.55 billion of similar debt this week.
Securities designated as 144a have been increasingly popular with issuers and the outstanding market for the debt has grown more than five-fold in the last six years to $478 billion, according to Bank of America Merrill Lynch Indexes. About $125 billion of junk debt designated as 144a-for-life was sold last year, up from $8 billion in 2006, according to S&P Capital IQ LCD.
“It’s a zero sum game, and the only winners are issuers and their underwriters,” Fridson said.
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