Mar 25, 2023
Corporate Debt Becomes Market of Haves, Have-Nots: Credit Weekly
(Bloomberg) -- Investors are quickly dividing corporate borrowers into the haves and the have-nots.
Worries about the health of banking systems on both sides of the Atlantic, increased market volatility and another round of interest-rate hikes from central banks are creating a dichotomy. Companies with investment-grade credit ratings are still finding reasonable access to credit, even if at a higher cost. Those with low ratings, meanwhile, are seeing their debt being shunned.
Eighteen blue-chip companies rushed to market this week after a six-day halt that was caused by the collapse of Silicon Valley Bank and the forced takeover of Credit Suisse Group AG. By week’s end, companies from UnitedHealth Group Inc. to Marriott International Inc. had priced about $21 billion of bonds, even in a market where investor caution prompted a few issuers to pass. It was a different picture in the market for high-yield debt, where issuance has been frozen since early March, leaving issuance at a mere $4.15 billion for the entire month. That’s the lowest March volume since 2020.
The gap can be seen in the yield spreads investors are demanding to own bonds in each market. The extra premium for junk-rated debt climbed rapidly this week to a five-month high of 3.67 percentage points more than that of investment-grade debt, Bloomberg index data show. As Bloomberg’s Olivia Raimonde and Josyana Joshua reported on Friday, gaps are also widening within the junk-bond market. The difference in spreads between B and CCC debt — the two weakest tiers of corporate debt — also reached the highest level since October earlier in the week.
To be sure, finance chiefs at low rated companies have learned from previous market disruptions to tap bond investors when they can and prepare for prolonged periods of limited access. It will also likely take time until a bigger wave of issuance materializes in the investment-grade market, said Ellis Phifer, a managing director for fixed income capital markets at Raymond James. “That confidence will take time,” he said, noting that the upcoming earnings season may prompt another slowdown in sales as companies enter their so-called quiet periods.
The picture isn’t much better in the market for leveraged loans. Westport, Connecticut-based toymaker Melissa & Doug LLC broke a week-long deadlock in sales on Thursday by launching a $260 million transaction to extend the maturity of existing debt by two years. It’s coming at a hefty price, though, as Bloomberg’s Jeannine Amodeo reported, potentially resulting in about $13 million to extend the debt, per Bloomberg calculations. The company’s transaction, which is due March 31, comes after bank underwriters pulled several leveraged loan deals in light of recent market jitters.
If markets remain volatile, amend-and-extends like Melissa & Doug’s, as well as other liability management transactions, could become harder to pull off for certain businesses. That could result in more bankruptcies.
“In the past few years, when rates were lower and financing was more available, companies had more opportunities to stave off a bankruptcy and do a liability management transaction,” said Brian Resnick, a restructuring partner at Davis Polk & Wardwell LLP.
“With the current state of the markets, we are still seeing some of that, but more companies are needing to do more comprehensive restructurings, either in- or outside of bankruptcy court,” he said.
- Two issuers in the US investment-grade bond market that stood down Thursday are expected to take another look in the coming days. Syndicate desks will likely seek windows of calm to bring other deals. In Europe, a majority of respondents in a survey expect less than €25 billion of issuance in the coming week.
- As they orchestrated UBS Group’s takeover of Credit Suisse, Swiss regulators roiled the $275 billion market for junior bank debt known as AT1s by wiping out $17 billion issued by Credit Suisse — even though the deal preserved $3.3 billion for equity investors. That prompted investors to start demanding a “Swiss premium” for the debt of banks in the nation.
- Amid the AT1 fallout, some small banks in China opted to not redeem their other junior debt known as Tier 2 bonds. At least three rural banks have decided to skip bond call options so far this month, from the debt-riddled province Shandong to the central province Hubei.
- China Evergrande’s release of its restructuring plan, 15 months after its first default on public dollar bonds, offered creditors options between new debt or a combination of debt and shares tied to its Hong Kong-listed units. The resolution gives assurance to some, but also raised questions over the value of the equity, including those of a cash-strapped electric vehicle firm. Moreover, the developer disclosed it needs as much as $43.7 billion of new financing, without saying where it plans to obtain the fund.
- Banks that underwrite leveraged finance deals in the US and Europe are pulling sales and pausing future ones amid tepid demand for the debt, as the turmoil in the banking industry starts to take its toll on the market. Barclays Plc recently shelved a pair of loans for Ineos Enterprises and Russell Investments, while JPMorgan Chase & Co. yanked a deal for Agiliti Health.
- The successive collapses of Silicon Valley Bank and Credit Suisse are expected to add to the momentum behind the $1.4 trillion private credit industry — provided the banking crisis stops there. Direct lending heavyweights Intermediate Capital Group Plc, Hayfin Capital Management and AlbaCore Capital Group, see private credit getting more deal flow off the back of the banking industry’s difficulties.
--With assistance from Josyana Joshua, Olivia Raimonde, James Crombie, Dorothy Ma, Bruce Douglas and Jeannine Amodeo.
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