To help pay for its recently completed $8 billion buyout of the margarine and spreads business of Unilever — since renamed Flora Food Group — KKR, the private equity firm, offered investors 1.1 billion euros (about $1.3 billion) of senior notes with a minimal covenant package. Moody’s rated it 4.99 on a scale of 1 to 5, with 5 being the weakest. Nevertheless, investors gobbled them up.

Or consider the mighty AT&T — now stuffed to the gills with an estimated $180 billion in debt following its $85 billion acquisition of TimeWarner. It is, according to Moody’s, the “most indebted, nongovernment controlled, nonfinancial rated corporate issuer” and one now “beholden to the health of the capital markets.” In other words, the company is so indebted that chances are high it will need continuing access to the credit markets to refinance and pay back its mountain of debt as it becomes due.

So-called junk bonds — issued by companies with poor credit ratings — historically have yielded around 10 percent or more, to compensate investors for taking the risk of buying the debt of such companies. These days, junk bonds yield around 6.25 percent, meaning that investors — still desperate for yield — have overpaid for these bonds sufficiently to drive down their effective yields to levels that fail to compensate them for the risks they are taking.

When junk bond yields return to more normal levels, as interest rates rise and investors’ yield-fever breaks, the price of the bonds bought during the feeding frenzy will fall and billions of dollars stand to be lost — by endowments, pension funds and high-yield funds, among others — as bonds across the board are repriced by the market.

Eoin Treacy's view

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A quip from my time at Trinity College was “you go to university to drink from the fountain of knowledge, and you drink and you drink and you drink” When I think about the influence quantitative easing has had on corporate treasury activities that is what I am reminded of.  

Taking advantage of low interest rates to refinance more expensive legacy debt was the first action of corporations in this cycle. Issuing debt to pay dividends and buy back shares is one of the primary uses for debt today and is often justified on a weighted average cost of capital basis.  and has been

An additional strategy which was used by companies until the tax cuts came into effect, was to issue debt in the currency of the country where income was sourced and repatriate the proceeds. Since the borrowed capital is not taxed this offered an expedient way to get around paying corporation taxes.
All of these strategies ensure that a lot debt will need to be refinanced over the course of the next few years. So far US high yield spreads remain contained but they are trending higher in Europe and Asia. Generally peaking high yield debt trades more like equities than Treasuries because of the relative risk. In fact, credit tends to lead equities which is why I have made such a strong point of keeping an eye on these measures over the last year.

This graphic highlights the fact that European covenant-lite debt is now outstripping issuance in the USA. The primary reason such issuance has been possible is because savers were disadvantaged relative to risk takers by quantitative easing. Savers have been forced to accept lower returns and looser standards of due diligence in return for anything close to the yields required to meeting their obligations. That market dynamic is unlikely to end well for the owners of the debt of heavily leveraged issuers when credit does eventually tighten.