Peak Rates Boost US Demand For Riskier Form Of Corporate Debt

The US market for one of the riskiest types of corporate debt is resurging this year, as companies cater to investor demand for assets that can lock in high yields for several years ahead of an expected decline in interest rates.

Holders of these bonds, called junior subordinated debt, are among the last to be paid in case of a default and companies can defer interest payments.

The reward for such high risk is yields that exceed those of senior bonds, for maturities of up to 40 years, though issuers typically call, or redeem, the bonds in five or 10 years.

Like stocks, these hybrid bonds rank low in a company's capital structure, but they resemble bonds with interest payments.

With the Federal Reserve widely expected to start cutting rates later this year, investors are scrambling to get their hands on securities that will pay the current levels of high interest for years to come.

To meet this demand, five companies this year have issued USD 4.6 billion of junior subordinated debt, and a sixth hit the market on Thursday. This pace is significantly faster than in the last two years, Barclays data shows, with USD 8 billion issued in full-year 2023.

Barclays' analyst Bradford Elliott estimates sales of junior subordinated bonds could reach USD 15 billion to USD 20 billion this year. Investors have plowed in a net USD 1 billion into funds that invest in hybrid bonds since October, he noted.

The renewed interest is giving companies an additional financing option as debt comes due.