Companies across America shelved plans to sell debt this week, as the coronavirus outbreak sent shudders through bond and loan markets and pushed up the cost of borrowing.
Fire protection equipment maker Minimax, gas processing company NorthRiver Midstream and industrial gas supplier Messer Industries were among companies to have pulled proposed loan offerings due to a sudden drop in debt prices, according to people with direct knowledge of the deals. Bankers said at least 10 companies also sat on the sidelines of the bond market, holding off from planned issuance as sentiment turned sour.
“There are a lot of companies with demand for funding but we have been in freefall this week,” said Jim Shepard, who runs investment-grade bond issuance at Mizuho in New York. “We need some sense of stability and then deals will start to come . . . Issuers don’t want to jump into a market that is in disarray.”
Fears over the potential impact of the viral outbreak on corporate America have prompted investors to re-price outstanding debt — wiping out returns for the year in both the junk bond and leveraged loan market, while dramatically increasing companies’ cost of funds.
The additional yield, or spread, above US Treasuries on a widely watched junk bond index run by Ice Data Services rose almost a full percentage point to 4.8 per cent by Thursday, marking its highest level since June 2019.
The slide in debt markets comes as US stock indices have experienced double-digit declines in a matter of days, with the S&P 500 recording its most rapid correction — defined as a 10 per cent fall from a recent peak — since the Great Depression of the 1930s. The weaker outlook for earnings that has unsettled equity investors has also raised concerns about the ability for some highly-levered companies to continue servicing their debts.
“If the virus scare continues, it could eventually lead to defaults,” said John Gregory, head of leveraged finance at Wells Fargo Securities. “When you consider what is going on right now and the fact the US hasn’t seen the same measures as Asia or even Europe, my view is there is more to go.”
Junk-rated energy companies have suffered the brunt of the sell-off in bond markets, dragged down by falling commodity prices. Transportation and travel companies also came under heavy pressure this week, as investors bet that Covid-19 would squeeze activity.
A 2027 bond issued by Viking Cruises was trading above its original sale value at more than 104 cents on the dollar last week, before tumbling below 90 cents in recent days. That fall in price increased the indicative yield on the bond by roughly 2.5 percentage points to 7.7 per cent.
The rush from risky assets has prompted investors to pull money out of high-yield bond funds, with $6.8bn withdrawn over the week to Wednesday, according to EPFR Global. This number included $4bn in outflows for BlackRock’s flagship high-yield exchange-traded fund, often identified by its ticker HYG.
“It’s hard to have a lot of conviction or confidence right now,” said Andrew Forsyth, a portfolio manager at BNP Paribas Asset Management. “That’s the biggest challenge.”