With volatile markets fraying investors’ nerves, companies are finding it tougher -- and increasingly expensive -- to sell new bonds.
U.S. investment-grade debt sales have missed Wall Street estimates for two consecutive weeks with issuers choosing to sit on the sidelines instead of braving volatile markets. Bond sales were expected to pick up this week amid a growing backlog, but seven potential issuers opted to stand down amid broad volatility on Monday.
The Markit CDX North American Investment Grade Index, which rises with increased credit risk, has soared more than 11 basis points since Wednesday’s Federal Reserve meeting. It traded as high as 91 basis points on Monday, implying the biggest hedging cost for investors since May 2020.
Huntington Bancshares Inc. -- the lone U.S. high-grade bond issuer on Friday -- paid a premium as high as 40 basis points, according to Bloomberg strategist Brian Smith. That compares to an average of 9.5 basis points in so-called new issue concession for U.S. companies so far this year, and just 2 basis points in 2021, according to data compiled by Bloomberg. The metric denotes the extra yield on a new bond compared to the seller’s existing debt.
In Europe, companies are paying the biggest premiums to sell new debt since the height of the coronavirus pandemic two years ago.
Issuers including Philips and TenneT Holding BV have lured investors by paying a more than 22 basis-point premium on average to sell new euro bonds. That’s the highest in about two years, according to data compiled by Bloomberg tracking fixed-rate deals priced since the last week of April.
Others are abandoning sales entirely. Europcar Finance on Monday decided not to proceed with a euro-denominated sustainability-linked note sale given “significant deterioration in market conditions over the course of the deal roadshow,” a spokesperson confirmed.
The tougher funding environment underscores the new regime companies face as the Federal Reserve and central banks globally tighten the supply of money to try and tame a red-hot economy.
Firms are footing the extra cost to drive demand for their deals and ensure they get them over the line as the global economic outlook grows increasingly uncertain. Euro-denominated high-grade borrowing costs are at the highest in nearly two years after April ranked as the worst monthly performance for global corporate bonds since the pandemic first roiled markets in March 2020, a Bloomberg index shows.
“The psychology of issuers has moved away from looking to price deals with a negative new issuance premium, to just getting deals done, while avoiding the risks of execution,” said Marc Baigneres, the head of Western Europe, Japan & Australia investment-grade finance at JPMorgan Chase & Co. “Patience has become key.”
Gucci owner Kering SA’s latest deal illustrates how market dynamics have changed. The French luxury fashion group ended the longest dry spell for sales of euro non-financial bonds since 2020 with a two-part deal on April 28 that included an eight-year note priced about 14 basis points above its existing bond curve. That’s a stark contrast to its last euro offering in 2020, when it issued two notes at spreads well inside its existing curve, Bloomberg data show.
The year’s biggest sweeteners can be found in last week’s four-part green offering from Dutch power company TenneT. Buyers received concessions of more than 40 basis points on a 2029 tranche and 38 basis points on a 20-year note.
Spokespeople for Kering, Philips and TenneT and Huntington Bancshares didn’t respond to requests for comment on the sales.
Current deal execution dynamics and oversubscription levels are “making some issuers rather nervous,” Rabobank’s debt capital markets team wrote in a note published May 4. “This year we seem to be looking out from one event to another which reduces the amount of favorable execution windows.”
With sentiment in markets very tense, it’s likely borrowers choosing to access Europe’s debt market will keep paying up for now.
“Volatility means that we need to keep our cards much closer to our chest before we execute and be cleverer about how and when we bring clients to the market,” JPMorgan’s Baigneres added.
Elsewhere in credit markets:
Americas
BlackRock upgraded investment-grade credit to neutral as it looks to reduce risk on a worsening macroeconomic outlook.
- Frontier Communications Holdings is selling $800 million of junk bonds, the first company to come forward with a deal this month amid a selloff that’s keeping would-be borrowers on the sidelines
- Bonds issued by Party City dropped after the retailer reported poor earnings and cut its full-year revenue forecast, as it continues to contend with supply-chain disruptions
- Armstrong Flooring Inc. filed for bankruptcy protection, saying it couldn’t raise prices high enough to keep up with rising supply and transportation costs
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
EMEA
Three issuers kicked off the week’s primary sales, with none of the deals tightening from their initially offered spreads, while a slew of mandates is set to drive issuance later in the week.
- This week’s investment-grade bond pipeline includes a planned euro benchmark 8Y deal from Electrolux which may also come as early as today
- Weekly issuance is seen exceeding 30 billion euros by 19% of respondents in a Bloomberg News survey conducted on May 6
Asia
Credit markets saw a weak session on Monday with a market holiday in Hong Kong halting sales. Debt risk climbed globally last week and Treasury yields surged on inflation concerns.
- Bond markets could be in for something of a rebound after having racked up a record straight nine months of losses, with April the worst ever, yet fund managers are already pointing to signs of a change in the inflation and economic growth outlook
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