Weekly Brief: Credit
Half a Trillion Bond Orders in 10 Days
The Flight of the CCC Bonds
By Olivia Raimonde
Investors are snatching up the riskiest US junk bonds, and companies are increasingly waking up to how much demand is jumping.
Two CCC companies sold high-yield bonds this week: W&T Offshore Inc., and Transocean Ltd., both of which are in the offshore oil and gas drilling industry. (The notes Transocean is selling will be rated in the B range because they’re secured).
Investors have shown a growing appetite for lower-rated junk debt. Bonds rated in the CCC tier have gained 4.5% through Jan. 12, outpacing the 3.4% gains notched by bonds in the B tier, the next grades higher, according to Bloomberg index data.
Junk bonds have been helped by light issuance, and investors’ growing belief that the Federal Reserve can tame inflation without bringing a recession, a notion that last week’s jobs report and the latest consumer price index data only added to.
The high-yield bond market has been a ghost town for most of the last month, with minimal issuance. But if demand keeps growing, banks that are sitting on unsold bonds and loans tied to leveraged buyouts may be able to offload more of that debt, said John McClain, a high-yield portfolio manager at Brandywine Global Investment Management.
“‘Fear of missing out’ is getting reintroduced with managers sitting on high cash balances and defensively positioned,” McClain said. “It’s off to the races now.”
That demand is evident in junk bond exchange-traded funds. More than $1.7 billion flooded into the $18 billion iShares iBoxx High Yield Corporate Bond ETF last week as it rallied 2.6%. It was the biggest weekly haul since November 2020, data compiled by Bloomberg show.
The leveraged loan market is showing signs of opening up again as well, with sales from RelaDyne Inc. and Ciena Corp. among those hitting the market this week.
In the high-yield market, W&T Offshore sold a $275 million second-lien secured bond for a refinancing due in 2023 with a yield of 11.75%. Offshore drilling contractor Transocean, meanwhile, paid a yield of 8.375% for a $525 million bond due in five years to in part finance the construction, acquisition and improvement of its drillship Deepwater Titan, as of the launch of the note sale. The company boosted the size of the offering from $500 million.
Risk remains. Junk bonds fell more than 11% last year on a total return basis, their worst performance since 2008. The average yield for CCC rated debt was 13.07% as of Jan. 12, down from 14.26% at the end of 2022, but up from 7.2% on Jan. 10, 2022, according to data compiled by Bloomberg.
Even if demand for lower-rated issuers continues to grind higher, investors from Vanguard to Nuveen and JPMorgan Asset Management have said they are avoiding weaker corporate credits as money managers position their portfolios for a downturn at some point this year. Markets in recent months have shown they can shut as quickly as they open.
The “outlook for high yield deal volume remains challenging,” Barclays strategists Bradley Rogoff and Dominique Toublan wrote in a note last week.
Jefferies Financial Group said its fixed income revenue jumped 71% in the three months ended Nov. 30, helped by emerging markets trading, and that strength carried over into December, signaling potential strength for the business at major dealers globally. The news wasn't all good for the bank: overall net income fell 57%, and the company cautioned last month that bonuses would be weak because markets including leveraged finance were closed for much of the year. But the results underscore that the upcoming "year of the bond," as some investors and banks are calling it, won't just be good for credit returns, it may well be good for dealers' trading profit too.
The biggest US banks are due to post results starting on Jan. 13, led by JPMorgan Chase, Bank of America, Citigroup and Wells Fargo. Goldman Sachs Group and Morgan Stanley are expected to post results on Jan. 17. Banks are widely expected to sell bonds after their results, but issuance volume will probably be below last year's levels. (See Market Calls, below).
China is planning to relax restrictions on developer borrowing, dialing back the stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history. Beijing may allow some property firms to add leverage by easing borrowing caps, and push back the grace period for meeting debt targets set by the policy, according to people familiar. The easing adds to a clutch of measures issued since November to bolster the battered sector that accounts for about a quarter of the nation’s economy. Elsewhere in China debt news:
Chinese officials are considering a record quota for special local government bonds this year and widening the budget deficit target as they ramp up support for the world’s second-largest economy, according to people familiar.
China’s new regulation to increase scrutiny of companies’ foreign debt will become effective Feb. 10 in the market’s biggest overhaul since 2015. The effort will encompass debt instruments with tenors of over one year that are sold by Chinese firms or their controlled offshore entities, according to an announcement this week.
Country Garden Holdings has told some investors that it has prepared funds to repay dollar debt due in January, according to people familiar, after a series of fundraising efforts. The nearly $700 million of dollar bond principal and coupons coming due is the biggest repayment test in months faced by the country’s top developer, according to Bloomberg-compiled data.
As traditional financing markets have become less predictable, more companies are turning to private credit. Goldman Sachs Asset Management has raised more than $15 billion for a fund to profit from this phenomenon, according to a statement seen by Bloomberg News. West Street Mezzanine Partners VIII, as the new vehicle is known, closed with $11.7 billion of capital commitments, topped up with $3.5 billion of leverage, the wealth manager said.
United Airlines Holdings borrowed against four of Boeing 787-9 aircraft valued at a total of more than $540 million. The loan came from private lender Castlelake, and its size wasn't disclosed.
Distressed debt activity is ramping up, with a few companies in contention for first major bankruptcy filing of the year. Bed Bath & Beyond has begun preparations for a bankruptcy filing that would likely come during its first operating quarter of the year, according to people familiar. The Union, New Jersey-based company last week called off a proposed debt exchange and said that it might not be able to continue as a going concern. The structure of the its bankruptcy will revolve mainly around the fate of its prized Buybuy Baby brand, which comprises much of the company’s value. Elsewhere in bankruptcy news:
Party City Holdco is laying the groundwork for a bankruptcy filing within weeks that may end with creditors taking ownership of the retailer, according to people familiar. The company will likely miss a coupon payment due in mid-February and could seek reprieve from its creditors to negotiate a restructuring, according to the people. It has sought funding for a potential chapter 11 bankruptcy.
Bahamian liquidators and the US team overseeing the bankrupt FTX crypto empire struck a deal to end most of their legal disputes, the two sides said on Jan. 6. Under the proposal, the two sides will share information about the firm’s crypto assets, dispose of various properties owned by FTX units and cooperate to try to collect as much money as possible for creditors, according to a statement. Billionaire New England Patriots owner Robert Kraft and star NFL quarterback Tom Brady are among the shareholders that may be wiped out by FTX Group’s sudden implosion.
Even as Ghana takes its third big step to extricate itself from debt distress, bond investors face a new complication: political uncertainty. The ruling New Patriotic Party will pick its next president later this year and two ministers have quit in the past week presumably to join the leadership race. General elections due 2024 mean there’s no guarantee the next government will abide by anything that’s agreed.
Forma Brands, the parent company of makeup retailer Morphe, filed for bankruptcy in Delaware on Jan. 12 with plans to be taken over by lenders including Jefferies Finance and Cerberus Capital Management
Elliott Investment Management has scooped up several struggling buyout loans in the past few months, and now it’s also turning its eye to risky debt offerings that pay sponsors chunky payouts. In late December, the investment firm bought significantly more than half of a $415 million leveraged loan by McAfee Enterprise with a 12% coupon that paid private equity sponsor Symphony Technology Group a large dividend, according to people familiar. Earlier, the firm doubled-down on two of its own equity investments by buying $1 billion of junk bonds helping to finance its buyout of software company Citrix Systems in September, and a portion of a $2 billion junk bond deal supporting its take-private of TV ratings business Nielsen Holdings in November.
A lender group led by UBS Group will soon reach out to investors for a leveraged loan sale that will help fund private equity firm Clayton Dubilier & Rice’s acquisition of a stake in Roper Technologies’s industrial operations business. Although investor outreach efforts are typical ahead of a loan’s formal launch, this activity is notable because the market has been largely closed to deals financing sizable buyouts.
US investment-grade bond issuers rushed into the market ahead of consequential consumer price index data that held the potential to spark volatility and sideline issuers, but ultimately proved benign.
Yankee banks dominated sales, with Royal Bank of Canada selling a $3.75 billion debt offering that helped bring sales from the North American country’s banks closer to a record for January issuance set last year. Other foreign issuers included Deutsche Bank, BNP Paribas, National Bank of Canada and BPCE.
Meanwhile, electric motor and control manufacturer Regal Rexnord built an order book of more than $18 billion for its $4.7 billion four-part deal to help pay for its Altra Industrial Motion acquisition.
Over $36 billion of high-grade notes were priced during the week as of Jan. 11. That compares to dealer estimates calling for up to $35 billion, and bumps monthly sales to $94.1 billion.
Next week, self-led debt sales from the six largest US banks are possible as the financial giants report earnings and exit blackout periods, making them candidates to sell debt. Bank of America, JPMorgan and Wells Fargo are set to report results starting on Friday.
A lender group led by UBS plans to reach out to investors for a potential leveraged loan sale that will help fund private equity firm Clayton Dubilier & Rice’s acquisition of a stake in Roper Technologies industrial operations business.
Talks on a potential $1.5 billion offering are slated to begin shortly with a loan transaction targeted to come in February, according to people familiar with the matter, who asked not to be identified because the discussions are private.
While new leveraged loan launches have been slow — there have only been three new deals this year — a rally in loan prices has gained steam and might serve as a catalyst for borrowers to come forward in the coming weeks. Prices have risen to 93.56 after closing last year at 92.44.
Japanese e-commerce giant Rakuten Group increased the size of its junk bond offering to $450 million from $200 million in a sign of strong investor demand. Amazon’s competitor in Japan is adding on to a series of notes that it first sold last year, according to a person familiar with the matter.
Elsewhere in the US junk bond market, multiple issuers broke out of a funk that’s been a regular part of the market since the Federal Reserve started raising interest rates to stem the highest inflation in decades. Junk bonds have been rallying of late, which has given issuers confidence to dip back in the market. Venture Global, Transocean and Ford are among companies that have sold debt in 2023.
Issuance stands at $4.7 billion so far in January, which compares to $2.27 billion in all of December.
CarMax, Ford, Mercedes-Benz and Nissan are among borrowers that might tap the US asset-backed securities market with auto loan or lease-backed transactions, according to premarketing announcements or filings with the SEC. This coming week is likely to be the first of the new year with heavy sales flow as that market typically starts any new year at a slower pace than other corners of credit.
Europe’s primary market was busier in the first four days of this week than it’s ever been in one whole week, according to data compiled by Bloomberg, with over €99 billion ($107 billion) of sales as issuers blasted out a stream of offerings.
Italy, Pirelli and Deutsche Bank were among more than 80 borrowers to raise funds. The sales haul beats a previous record of more than €98 billion raised in one week during January a year ago.
Financial groups were in the market with the biggest volume and over half the number of tranches offered this week; FIGs have now sold as much so far this month as they did in all of January last year. Banco Santander sold a whopping €5 billion senior preferred offering, which may be the largest deal ever offered in the EMEA market by a financial group.
Dalian Wanda Group, one of China’s biggest conglomerates, sold $400 million in the dollar bond market after a 16-month absence in the latest sign that Beijing’s economic rescue efforts are easing funding conditions for cash-strapped private firms. A unit of the company’s property arm sold a two-year note to yield 12.375%, lower than initial price discussions for 12.625%, according to a person with knowledge of the matter.
Asia dollar bond sales continued to flow this week, as spreads have narrowed during a period of relative calm in financial markets and optimism following China’s lifting of its Covid-zero policies. New debt deals were sold by South Korea’s Posco and SK Hynix, among others. SK Hynix racked up peak orders of $16.4 billion at the peak for its $2.5 billion debt sale.
— With assistance from Gowri Gurumurthy, Jeannine Amodeo, Brian Smith, Diana Li, Colin Keatinge, Charles Williams, Dorothy Ma, Chris DeReza
Rising Rates Are Hitting Private Borrowers, Antares’s CIO Says
Tyler Lindblad, chief investment officer at Antares Capital, says private credit firms are figuring out how to navigate higher interest rates and slowing economic growth, which will probably hit the companies they lend to.
Lindblad, whose firm oversaw more than $55 billion as of the middle of last year, spoke to Bloomberg’s David Brooke on Jan. 10. Comments have been edited and condensed:
What areas are interesting for private credit deals now?
Attractive sectors include those that are less cyclical, such as non-elective healthcare platforms, mission-critical software and technologies, as well as recurring revenue within insurance and business services.
Like most lenders in the space, we’re taking a cautious approach to capital deployment given the economic and geopolitical environment. Much of our activity over the last year was in support of existing borrowers who we know well and have confidence in their ability to execute their growth plans. We expect that to continue through 2023.
Lenders are getting more favorable terms compared with previous years. Do you expect that trend to continue?
Yes, the pendulum has shifted and lenders are in the driver’s seat around terms and conditions. Pricing has widened, fees have increased, leverage multiples have reduced and lenders are pushing back on aggressive EBITDA adjustments receiving call protection, being able to keep most favored nation conditions and covenant lite for certain companies. We anticipate that this will continue in a challenged market.
Do you anticipate more mega unitranches this year?
We don’t anticipate the same number of mega unitranches as we saw in 2021 or the first half of 2022 but we expect $1 billion-plus unitranche facilities to continue in 2023 for scaled high quality companies. You’ll also see the number of lenders included in these clubs increase compared to 2021.
What is the biggest challenge for private credit firms this year?
Private credit is well positioned due to a number of factors – floating-rate instruments, double-digit first-lien yields, lower leverage and tighter terms.
But the focus will be on the full-year impact of higher interest rates coupled with a slowing economy that’s likely to tip into recession. So far, middle-market companies in the Antares portfolio have been able to manage through inflation and supply-chain issues by passing through price increases. That continued performance will depend on how deep a recession might be and how well a portfolio is constructed.
Half a Trillion of Orders in 10 Days
By Hannah Benjamin-Cook and Tasos Vossos
Demand for Europe’s debt sales has already topped half a trillion euros in 2023 as investors seek to put money to work in bonds offering some of the highest yields in years.
Investors have bid €530 billion ($570 billion) — more than three times the €168 billion of issuance in Europe’s syndicated primary market this month through Jan. 11, according to data compiled by Bloomberg. The tally includes all publicly-syndicated company and government bond offerings, with demand running well above the average for the prior five years to the same point.
“Fixed income is finally back for investors and investment-grade is in the sweet spot,” said Henrietta Pacquement, head of the global fixed income team at Allspring Global Investments. “There’s a fair amount of appetite for investment-grade credit, as well as cash that needs to get invested.”
Debt from borrowers like German utility E.On SE and Italy’s Enel SpA is in demand amid a stabilization in global markets following a torrid 2022 that saw the worst annual returns on record for euro high-grade credit. Investors can now get an average yield of more than 4% when they buy euro-denominated debt of blue-chip firms — almost seven times the yield offered a year ago and close to the highest payout in more than a decade, based on Bloomberg indexes.
It’s also helping that portfolio managers have a big pool of cash to chase these lofty yields. European high-grade funds have been drawing investor inflows for 11 consecutive weeks, based on EPFR Global data cited by Bank of America Corp. strategists.
And European markets in general have come back into favor with investors at the start of 2023, after a milder-than-expected winter and some better inflation data in the region soothed fears of a painful recession.
The bright spots at the start of the year don’t eliminate the risk of an economic slowdown at a time when credit investors can no longer rely on central banks to support them.
“In a portfolio where you can invest anywhere, it makes sense for investors to take advantage of higher yields in high grade without taking too much credit risk,” said Thomas Leys, a London-based investment director at abrdn plc. “Core inflation is still rising, geopolitical risks are still high, the consumer outlook is still weak and the risk of recession remains elevated — all while the ECB is no longer buying a large chunk of every deal.”
However, there’s mounting evidence that traditional investors are already starting to take the European Central Bank’s place. Investment-grade funds drew the lion’s share of flows to fixed income ETFs in the fourth quarter of 2022, according to Paul Syms, head of EMEA ETF fixed income product management at Invesco.
“There was some caution last year in terms of taking on credit risk but as we come into the new year, there is a re-evaluation of yields and spreads that is leading investors to start looking for pockets of value,” said Syms, who believes 2023 “could be the year for credit.”
Some of the world’s largest asset managers such as BlackRock, Fidelity Investments and Carmignac are warning markets are underestimating both inflation and the ultimate peak of US rates, just like a year ago. The stakes are immense after Wall Street almost unanimously underestimated inflation’s trajectory, clobbering corporate bonds globally. But persistent worker shortages are likely to fuel higher-than-expected inflation according to Frederic Leroux, a member of the investment committee and head of the cross asset team at €44 billion ($47 billion) French asset manager Carmignac. Analysts at BlackRock’s Investment Institute also see high inflation persisting, with little hope that a recession will spur the Fed to cut rates.
About $53 billion of US high-yield bonds mature before the end of the year, according to a Bloomberg Intelligence report Tuesday, dialing up the pressure for those companies that have yet to secure the cash needed to pay back the money owed to investors. But money isn’t cheap anymore. That's been prompting high-yield issuers to hold off debt sales until it is absolutely necessary, contrary to the onslaught of opportunistic refinancings that flooded the market in 2020 and 2021 when rates were at rock bottom levels.
Tech companies including Microsoft and Meta Platforms are expected to hit the bond market in size to buy back stock after last year’s rout. As much as $20 billion in issuance from Microsoft and $10 billion from Meta could be on the docket, according to analysis by Bloomberg Intelligence's Robert Schiffman. The sector has more cash than others, giving it room to pursue bond sales to fund buybacks. The massive sell off in many high-flying tech stocks may push the industry’s behemoths to borrow more to help return money to shareholders as cash levels drop.
The six biggest Wall Street banks are expected to slash their corporate bond issuance in 2023 for a second year in a row, offering a bright spot for investors nursing record losses from the debt last year. The biggest US banks could sell a total of $20 billion to $25 billion across currencies this month after they post earnings, according to Bloomberg Intelligence’s Arnold Kakuda and Nicholas Beckwith. That would be about a 15% drop from last year, he wrote. And their full year sales may fall 33% to $132 billion, the strategists wrote. A falling supply could be a positive for corporate returns after a year where returns were hit by rising interest rates.
Blackstone has promoted Brad Marshall to lead its private credit efforts and hired former Barings executive Jonathan Bock to the team, as the private equity behemoth continues to expand a business that already makes up half its overall credit business. Marshall, who has been at Blackstone for 17 years, is taking on the firm’s newly created role of global head of private credit strategies, according to Blackstone. Marshall, who had been spearheading the firm’s US direct lending business, will remain based in NYC and report to Dwight Scott, Blackstone’s head of credit.
Investment advisory firm Antares Capital has hired Seth Katzenstein to boost its broadly syndicated loan business and expects to start packaging those loans into bonds known as collateralized loan obligations. Katzenstein joined Antares as managing director and head of broadly syndicated loans on Jan. 3, after over nine years at alternative asset manager Intermediate Capital Group, where he was head of US loans and high-yield debt. He will report to Vivek Mathew, Antares’ head of asset management, and will be based in New York, according to a statement seen by Bloomberg. The firm expects to recruit three to four additional staffers to the broadly syndicated loan team, added Katzenstein in a subsequent interview.
Silver Creek Capital Management hired Jessica Hans as a managing director focusing on non-corporate debt and real assets, part of the Seattle-based firm’s expansion in private credit. Hans previously served as investment director at UC Investments, an arm of the University of California. A 20-year veteran of capital markets, Hans will be a member of Silver Creek’s investment committee and real assets investment committee.
Libor Reaches Crisis-Era High
By Alexandra Harris
One of the world’s most important short-term lending benchmarks has climbed back to a level last seen before the onset of the global financial crisis in 2008.
The three-month London interbank offered rate for dollars climbed 1.5 basis points on Thursday to 4.82971%, exceeding the peak of 4.81875% it reached in October 2008 when credit markets were in disarray following the shock collapse of Lehman Brothers Holdings. The last time it was higher was in 2007.
The spread of Libor over overnight index swaps — a barometer of funding pressure — was at 16.3 basis points on Thursday versus 17 basis points the prior session.
Much of the recent surge in Libor, which is set to be phased out on June 30, has been driven by expectations for Federal Reserve policy tightening. The benchmark is moving in sympathy with many other short-term rates, but there are other elements that feed into the daily setting, including the backdrop for commercial paper transactions and broader credit conditions.
“It is supposed to reflect bank funding costs,” said Priya Misra, head of global rates strategy at TD Securities. “As reserves are falling, banks are paying up for funding.”
Editor Responsible: Dan Wilchins dwilchins@bloomberg.net
Data: Michael Gambale mgambale2@bloomberg.net
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