(March 19): It’s getting harder for the riskiest corporate borrowers to raise cash.
As the banking crisis this past week largely brought corporate bond and loan offerings to a halt, borrowing costs for junk-rated issuers surged, tipping the market value of debt for some of the most vulnerable companies into distressed levels.
The average yield spread — extra money investors demand for holding weaker debt — on US bonds with the worst credit ratings vaulted past 1,000 basis points. Leveraged loans — the other main financing option for risky companies — plunged to a 10-week low, and companies pulled debt deals at the fastest pace in a year as buyers fled.
“When high-yield companies come up for air, they are going to see much tighter financial conditions,” said Michael Anderson, head of US credit strategy for Citigroup Inc. “This is a pretty big shock to the financial system.”
Repricing of credit risk followed the collapse of US tech lender Silicon Valley Bank and a crisis of confidence in Credit Suisse Group AG that tipped the Swiss lender’s investment-grade bonds into distress. Global banking stress has tightened financial conditions so much that the Federal Reserve might not need to raise rates quite as high as initially expected to suppress inflation, according to Anna Wong, chief US economist for Bloomberg Economics.
Tighter financial conditions put additional pressure on vulnerable borrowers in sectors like retail, travel and leisure, many of which are already reeling from rising rates and a slowdown in the US economy. As more deals get pulled, high-yield companies will have to get more creative in order to be able to access capital.
“It’s going to be tough sledding for levered companies with capital needs,” said Hunter Hayes, portfolio manager of the Intrepid Income Fund at Intrepid Capital Management. “The junkiest issuers will have to sweeten the pot with equity kickers, better security, or other incentives to attract lenders.”
A new deal hasn’t priced in the US high-yield bond market since March 2 and there was nothing in the US high-grade market last week for the first time since June. In Europe, the only junk-rated bond to price did so at one of the highest yields in years.
Shock waves from the banking crisis are reviving bets on a hard landing for the US. That doesn’t bode well for those that need cash, says Scott Kimball, chief investment officer at Loop Capital Asset Management.
“Small business and consumers alike have increased borrowing to maintain spending in the face of persistent inflation,” he said. “A tightening in the credit markets — which directly affects them — may quickly and meaningfully reshape the growth outlook.”
What to watch in the days ahead:
- UBS Group AG and Swiss officials are racing to put together a deal for the firm to take over Credit Suisse. Price quotes on Credit Suisse bonds were climbing during a rare weekend trading session, people with knowledge of the matter said.
- The Bank of England and the Swiss National Bank are meeting in the upcoming week and will weigh the fallout from the collapse of Silicon Valley Bank and Credit Suisse’s battle for survival. The BOE may increase rates by 25 basis points.
- Market pricing for the Fed’s March 21-22 meeting has lurched between another quarter-point hike and the first rate pause in more than a year.
- China Evergrande Group, the defaulted developer at the centre of a property debt crisis, faces a March 20 court hearing in Hong Kong on a winding-up petition. The Wall Street Journal reported that Evergrande was close to striking a deal with creditors.
- Next week has a chance to be busy for high-grade bond issuers if credit gauges begin to stabilize, following the first five-day run of no deals since last June. March volume is stuck at US$55 billion and seems unlikely to meet projections of US$150 billion.
An abrupt suspension of widely used bond price feeds in China with no official explanation disrupted trading in the nation’s 145 trillion yuan (US$21 trillion) onshore bond market, forcing desperate traders to turn to chatrooms to share prices and do deals, and prompting regulators to urge for market stability. But authorities subsequently made a fast U-turn, allowing such bond price feeds to be available again after soliciting feedback.
The episode drew attention to the risks of unexpected regulatory shifts in China, which makes up a growing portion of global fixed-income portfolios. Bond prices held up despite the transaction turmoil, with onshore corporate bond spreads continuing to tighten, standing out with other Chinese assets as an oasis of calm amid global market tumult.
- Defaulted Chinese property developers continue to ramp up restructuring talks, as CIFI Holdings Group laid out key preliminary terms for its offshore debt revamp, and Logan Group Co said it’s begun distributing draft restructuring proposals to offshore creditors.
- Silicon Valley Bank’s former parent company filed for Chapter 11 bankruptcy in New York a week after a run on deposits prompted regulators to seize its banking unit. Broker-dealer SVB Securities and venture capital arm SVB Capital aren’t included in the filing.
- Japanese companies are choosing bank loans over bonds for longer-term funding needs as investors — bracing for an end to the easy-money era — drive up yields, Ayai Tomisawa wrote. Japan Airlines Co took out yen loans in recent weeks, while brewer Suntory Holdings Ltd decided to partially refinance a subordinated bond with loans.
- Ares Management Corp is the latest investment manager to set up a business buying stakes in private credit funds from other investors needing to cash out fast, Silas Brown and Lisa Lee wrote. It’s the latest foray into credit secondaries, a growing area of private markets that’s also attracted interest from Apollo Global Management and JPMorgan Chase & Co’s asset management unit.