Credit chaos leaves debt-hungry companies sweating on bond sales

(Bloomberg) -- Companies are set to raise the least new debt in more than a decade this year and there's an unusual contributing factor: wild swings in markets mean borrowing windows often shut before firms can begin to sell their bonds.

The trend is set to continue into 2023 because credit committees at some firms aren't used to the levels of volatility, meaning demand can evaporate by the time they sign off on issuing securities, according to people with knowledge of the matter.

It's a major headache for companies that need to refinance, especially after central banks reaffirmed this week that they plan to keep raising interest rates. Declining consumer sales as economies slow also increases the risk of credit rating downgrades, increasing borrowing costs still further.

"Many will be sitting on their hands for a while and delaying spending until we have more clarity" on the economic outlook, said Sarah Boyce, an associate director at The Association of Corporate Treasurers. "The more expensive price of debt will be factored in to all decisions going forward."

Missing Windows

The turnaround in sentiment has been so dramatic that some European firms still haven't come to the bond market after almost an entire year because they keep missing borrowing windows, according to an investment banker at a US lender, who asked not to be named as he wasn't authorized to speak publicly. 

Barclays Plc, meanwhile, is advising borrowers to be ready to issue for as many days as possible.

"You need to be as flexible as you can, including on pricing," said Pete Mason, co-head of Capital Markets EMEA at the bank. "Overspend on refreshing documentation, be nimble and go and see people. Investors want to see you, especially if you've a tricky credit story to tell."

That's particularly true in the junk market, where there's been an almost 75% fall in the number of successful issuances this year in Europe. 

Selective Buyers

"The days of buying every primary deal that hits the market are over," said Vincent Benguigui, a senior credit portfolio manager at Federated Hermes in London. "We've been shielding our portfolio, reviewing our credit holdings, checking our portfolio is able to withstand rates."

With higher borrowing costs and the war in Ukraine damping demand, global corporate sales of the securities have slumped to about $2 trillion this year, according to Bloomberg League Table data. That's the lowest since 2011 and the euro-zone debt crisis era.

One company that did manage to get a deal away was Blackstone Group Inc.'s Cirsa Gaming Corp SA, which offered its bond when a risk gauge for high-yield debt was near the highest level on record.

"Markets have been really volatile over the last months and we have seen significant changes in prices in a few days," a spokesman for the gaming firm said. Borrowers cannot take it for granted "that you will get the price that prevails when you start the process, even if the process lasts just for a few days."

The Spanish gaming company raised €425 million ($452 million) in October — €75 million more than originally anticipated — to refinance most of its notes that come due late next year. The new bond pays four percentage points more than the bond sold in 2018 that it replaces.

Failed Deals

Other firms were less fortunate. About 140 fund raising transactions were pulled this year, including bonds, loans, and asset-backed securities worth at least $75 billion, data compiled by Bloomberg show.

Commerzbank AG's head of corporate credit research Marco Stoeckle expects European net issuance to fall next year as the continent and the US are facing recessions, which should dampen corporate investment and deal making.

Read More: US Credit Recession Indicator Bodes Ill for Europe Junk Debt

"Market conditions are returning to a similar situation as before 2008," said Boyce. "CFOs and treasurers that have been around since then understand this and know the extra work they need to do."

Elsewhere in credit markets:

EMEA

Europe's primary bond market is on course for its 50th blank day of sales this year — the highest annual tally ever — according to data compiled by Bloomberg going back to 2014.

• Sales of new bonds have been subdued amid a flurry of economic data and as the holiday season approaches: Issuers across all sectors have sold only €515 million this week — the lowest of the year by far — while December sales stand at €16.35 billion
  
  • The pace of corporate debt issuance in Europe has returned to historic norms amid a year of widespread volatility across global markets
• German development bank KfW and UniCredit Bank Austria lead €240 billion-equivalent of investment grade non-government euro and pound bonds maturing next quarter, according to data compiled by Bloomberg
• As the tide goes out on an easy money era that inflated Europe's real estate market, some of the world's most-feared short sellers have turned their attention to the region's landlords
  
  • Vivion Investments this week became at least the fifth European real estate company publicly lambasted by short sellers in little over a year after Muddy Waters published a critical report
    
    • The company, which owns hotels and offices in Germany and the UK, joins a list that also includes Germany's Adler Group SA, UK-based Civitas Social Housing Plc and Home REIT Plc as well as Swedish landlord Samhallsbyggnadsbolaget i Norden AB, or SBB
• Moody's Investors Service raised its forecast for speculative-grade corporate defaults in 2023, warning they could more than quadruple under its most pessimistic scenario
  
  • The agency predicts the default rate will climb to 4.9% by November of next year under its baseline scenario, from a forecast of 2.9% for the end of 2022. Last month's year-ahead projection was 4.5%

Asia

Bond issuance in the Asia ex-Japan region dropped to the lowest in six weeks as borrowers remained on the sidelines amid monetary policy decisions by the Federal Reserve and other central banks in Europe. The market is also gearing down for year-end holidays. 

• Deals fell to about $520 million in the five days through Friday compared with nearly $1.2 billion last week, according to Bloomberg-compiled data of bond sales with a minimum size of $100 million
  
  • That's the lowest since the week ended Nov. 4
• China's Panda bond market may start rebounding after authorities moved to make the market easier to access, including allowing repatriation of funds offshore, according to Alan Roch, head of credit for Asia Pacific at Crédit Agricole CIB
  
  • "For large international corporates that have businesses in China, they may want to fund these onshore businesses, and now with the ability to swap the funds offshore, they will start to look at multi-currency funding programs," Roch said in a recent interview
• Wireless operator Veon Ltd. is close to selling its tower assets in Pakistan to a consortium comprised of Pakistan's TPL Corp. and UAE-based TASC Towers Holding Ltd. in what could be the country's largest deal in more than a decade, according to people familiar with the matter
• China's government hinted at further support for the real estate sector, with a top policy maker describing it as a "pillar" of the world's second-largest economy
  
  • Vice Premier Liu He said new measures are being considered to improve the financial condition of the industry and boost confidence, according to a Xinhua report posted on the central government's website. Liu also quashed concerns that weak housing demand may lead to a long-term slump, saying China is still on a course of "relatively quick urbanization"

Americas

Texas lawmakers grilled finance industry executives they summoned to a remote corner of the Lone Star State for a hearing, questioning whether their environmental, social and governance policies are hindering state pension investments.

• The GOP-led committee on state affairs called the hearing on Thursday amid growing concern in the party that financial firms are pushing a "woke" ideology with investing rules tied to ESG issues. They summoned officials from BlackRock Inc., State Street Corp. and Institutional Shareholder Services Inc. to defend their practices before a committee made up of seven Republicans and two Democrats
• Credit Suisse Group AG has hired Guillermo D. Diloné from Deutsche Bank AG to trade high-yield bonds, according to a person with knowledge of the matter
  
  • Diloné will join the bank on Jan. 17 as a director and will be based in New York, said the person, who declined to be identified as the details are private
• The Central American Bank for Economic Integration is lending El Salvador $450 million, the president of the multilateral lender said, ahead of a bond payment due from the Central American nation in late January

--With assistance from Abhinav Ramnarayan and Tasos Vossos.
(Adds regional credit market news.)

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