Junk-rated companies are selling loads of debt again.

They're issuing dollar-denominated bonds at the fastestpace this month since October 2012.

This builds on the frenzy in the U.S. leveraged-loan market thisyear, which is on pace to be the most active ever.

The most obvious interpretation of this borrowing binge isthat it fits into the popular narrative of incredibly frothymarkets. In that scenario, speculative-grade companies are throwingcaution to the wind and packing on leverage at the expense oflenders. Supporting that argument is the reliance of more companieson debt markets to finance leveraged buyouts, locking inhistorically low rates.

But that narrative is far too simplistic and misses an importantpoint. Junk-rated companies have been able to borrow money cheaplyand easily for years, with the exception of a chunk of time in 2014and 2015 when oil prices took a dive. And interestingly, thetotal amount of publicly traded speculative-grade debt has actuallydeclined in the U.S. in recent years.

New debt sales have failed to offset the amount of securitiesthat are being upgraded or maturing.

A more accurate view is that the activity in U.S. high-yielddebt markets is mostly churn, which may benefit Wall Street most ofall. Companies are fortifying their balance sheets to be asresilient as possible in case of an economic downturn or marketselloff. Bankers and lawyers are eager to help becausetheir significant fees help pad bank balance sheets.

Indeed, even with a slow start to the year for U.S. junk-bondsales, investment banks have made $10.5 billion in revenue fromselling leveraged finance deals so far this year, up from $6.9billion in 2016; that's the highest level since 2013,according to Dealogic data cited this week by the Financial Times.That doesn't factor in the hefty fees paid to lawyers who scourdocuments and get paid hundreds of dollars an hour.

A lot of this activity stems from the leveraged-loan market,where companies are renegotiating deals at a record pace to lock inlower rates and looser terms. A record proportion of transactionshave removed provisions that allow investors to limit the amount ofnew debt companies take on in the future. Private equity sponsorshave been singularly aggressive in stripping away some of theseprotections, giving them more flexibility to deal with futureissues.

This borrowing spree is certainly problematic for many debtinvestors. They're getting less money and control over riskycompanies. But options are limited because the pool ofhigher-yielding debt is shrinking and many are required to investmoney clients give them.

For most of the companies, the borrowings aren't providingobvious longer-term strength except for perhaps more time toimprove their business. Adjusted leverage for both investment-gradeand speculative-grade issuers is near decade highs, according toS&P Global data. So companies have been boosting debt fasterthan they have bolstered revenues.

The biggest beneficiary may be the bankers and lawyers who areearning billions of dollars to negotiate and renegotiate deals,creating a distracting churn amid a relatively stagnant backdrop ofslow growth and global stimulus.

From: Bloomberg News

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