Investors Clamor for Risky Junk Debt Amid Pandemic Flare-Ups

LAGOS (Capital Markets in Africa) — Bond investors are pouring money back into riskier debt in search of higher returns as Covid-19 flare-ups and clampdowns have money managers bracing for interest rates to remain low for a long time.

Five of the six U.S. junk bonds that companies sold on Wednesday were increased in size to accommodate heavy demand, and yields ended up being lower than initially targeted on the deals. In the secondary market, notes rated in the CCC tier, essentially the lowest level that usually trades, have now had 12 straight sessions of positive returns, according to Bloomberg Barclays index data. That’s better than the overall junk bond market, which declined modestly on Wednesday, snapping six days of gains.

Chasing higher returns may make sense as the Covid-19 pandemic shows signs of flaring up again in major economies, implying central banks may keep rates low for some time. Some of Europe’s biggest cities are clamping down again to curb the virus. In the U.S., applications for unemployment benefits unexpectedly jumped last week, according to Labor Department data released
Thursday.

Meanwhile, some investors are shifting money into high-yield bonds. Retail funds are estimated to have seen $1.8 billion of inflows as of Tuesday’s close, JPMorgan Chase & Co. analysts wrote in a note, citing Refinitiv Lipper. Weekly data is due later today, and that number may change.

Strong demand has extended into the leveraged loan market, where investors are allowing even more private equity firms to treat their companies like ATMs. Blackstone Group Inc. is borrowing in the market again to fund a payout from its company Nexus Buyer, after doing the same thing with dating app Bumble last week.

Investors aren’t welcoming all these deals. Ligado Networks LLC had to hike the coupon on its second-lien notes to a stunning 17.5% to attract investors, and also dropped the leveraged loan portion and sweetened other terms. The deal will refinance upcoming maturities in an effort to avoid bankruptcy.

But money managers are still buying plenty of deals, even in Europe, where Brexit negotiations are entering a critical phase. European junk-rated borrowers have issued the most bonds since 2017 so far this year despite a lack of deals in March and August.

Junk-rated jet-engine maker Rolls-Royce Holdings Plc drew such demand for a bond sale this week that the company doubled the size of the offering to 2 billion pounds ($2.59 billion) equivalent and tightened the pricing.

U.S.
Morgan Stanley, the last of the major banks to report third-quarter earnings, posted a 35% gain for bond trading revenue in the period. The bank noted broad improvement across fixed-income businesses while singling out “particular strength in credit products benefiting from an active primary market.” Every major U.S. bank posted gains in quarterly bond trading revenue.
United Natural Foods is scheduled to price $400 million of bonds in the high-yield market Thursday

In investment grade, activity remains slow with only one offering expected, a $100 million tap announced by Colombian energy producer Promigas
Chile’s sovereign rating was cut one notch to A- by Fitch, reflecting secular pressure to increase social spending after last year’s widescale protests, compounded by the Covid-19 economic downturn. Fitch expects the economy will contract 5.8% in 2020 before rebounding 4.5% in 2021

Europe
Banco Santander, Austria and the German State of Schleswig-Holstein were among borrowers with deals in the market on Thursday.

Companies selling sustainability-linked bonds with environmental targets will probably be able to get pricing discounts next year due to ECB support, according to Deutsche Bank
New loans to U.K. commercial real estate declined in the first half by 34% from a year earlier as the pandemic batters the economy and stokes fears about looming defaults by landlords

Londoners will be banned from mixing with other households indoors, in private homes, or restaurants and other public spaces from Saturday
Brussels Airport Co. joined European hub operators seeking bondholder leeway, after coronavirus travel restrictions fueled an 80% slump in its summer passenger numbers

Asia
Spreads on Asian investment-grade dollar bonds were essentially unchanged Thursday, and are down about 2 basis points this week, according to a Bloomberg Barclays index.

Debt sales in Asia-ex. Japan this week have already surpassed totals for each of the past three weeks even before Thursday’s bump-up

China priced $6 billion of notes in a sovereign issuance on Wednesday for which it got more than $27 billion of demand

China Evergrande Group’s largest strategic investor is leaning toward demanding repayment of the $3.4 billion it’s sunk into the embattled developer, according to people familiar with matter, adding pressure on the company as it races to cut its massive debt load–With assistance from Finbarr Flynn, Irene García Pérez, Lilian Karununganand Gowri Gurumurthy.

Source: Bloomberg Business News