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Corporate debt becomes market of haves, have-nots: Credit weekly

Tan KW
Publish date: Sun, 26 Mar 2023, 12:38 PM
Tan KW
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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 US$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 US$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 US$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 US$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.


  - Bloomberg


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