(Bloomberg) -- The turmoil in global markets is threatening to end a summer debt boom that helped some of the riskiest US companies cut borrowing costs, push out maturities and even defer interest payments.
The change in tone was obvious on Monday, when SeaWorld Parks & Entertainment Inc. shelved its planned refinancing of a $1.55 billion term loan, while SBA Communications Corp. postponed the repricing of a $2.3 billion term loan. On Tuesday a $3.65 billion package for Focus Financial Partners was delayed, and market participants expect more lower rated deals will be pulled.
In other signs that a period of accommodation by investors is passing, the risk premium on junk-rated corporate bonds spiked to the highest since November 2023, and prices on leveraged loans dipped to the lowest level this year on Monday.
It's a dramatic turnaround from earlier this year, during which borrowers reworking debt to obtain better terms saved more than $1.4 billion in annual interest expenses from the beginning of 2024 through May. The tipping point was Friday's US jobs report, which implied that hiring is waning faster than previously expected, raising recession concerns and increasing pressure on the Federal Reserve to accelerate expected interest-rate cuts.
"For highly levered companies, investors will weigh the magnitude of lower interest rates on cash flow against a reduction in earnings in a slowing economy," said Scott Macklin, head of US leveraged finance at Obra Capital Inc. "That calculus on the net impact could be positive for less cyclical borrowers and negative for more cyclical borrowers."
Fading Loans
The shift in sentiment is stark in the leveraged loan market. Only a couple of weeks ago, collateralized loan obligation managers — the biggest buyers of the debt — were wide open to transactions and struggling to find new assets to purchase.
Now, retail investors are fleeing. The Invesco Senior Loan exchange traded fund on Aug. 2 saw withdrawals of almost $490 million, reducing assets to $7.69 billion, the lowest level since May 6, according to data compiled by Bloomberg.
Funds that invest in leveraged loans are on track to suffer their biggest weekly outflows since March 2023's regional banking crisis. Withdrawals from Aug. 1-5 were an estimated $1.44 billion, including a combined $682 million for actively managed funds and exchange-traded funds, according to JPMorgan Chase & Co.'s Nelson Jantzen.
The leveraged loan market had already seen softness in recent weeks as some new deals traded below where they priced, said Jeremy Burton, a portfolio manager at PineBridge Investments, in an interview.
"We're going to see repricings stop," Burton said. "Anything that hasn't come is going to be on pause."
Junk Declines
The transformation means that the junk bond market for the remainder of this year is likely to be even more challenging for risky deals such as those from Herbalife Ltd. or Staples Inc., which got done albeit at wider prices. In one extreme case, a Platinum Equity-backed company completed a rare payment-in-kind toggle note offering, the first seen since 2021.
An investor move into high-yield debt was based on the expectation that a drop in rates would boost bond prices, but concerns about the economy instead caused spreads to substantially widen and led to a selloff, said Grant Nachman, founder and chief executive officer at Shorecliff Asset Management.
"People got excited about high-yield last month because of excitement around interest rate cuts, but when you have spreads blow out, it's another story," he said. "The lower quality corners of the high-yield market start trading a lot more like equities, as opposed to higher quality bonds that tend to respond positively to falling rates."
A prolonged shutdown in new issuance markets not only would make it tougher for lower rated businesses to refinance, but also would exacerbate any economic downturn, something that the Fed will monitor closely.
In addition, borrowers likely would turn to the private markets, where many firms have found willing lenders in the past. Again, the Fed would be on the lookout for firms having difficulty refinancing their commitments, increasing the pool of distressed debt that had been shrinking for months and raising the chances of ratings downgrades and price spirals.
"If this volatility continues, earnings misses will be unforgivable," said Lauren Basmadjian, global head of liquid credit at Carlyle Group. "You'll see more drastic price movements in loans to borrowers who disappoint."
--With assistance from Neil Callanan.
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