US corporate debt markets are showing early signs of weakening as rising yields and falling equities take their toll.
(Bloomberg) — US corporate debt markets are showing early signs of weakening as rising yields and falling equities take their toll.
Risk premiums, or spreads, for investment-grade corporate bonds have climbed to their highest levels since June. In the junk-bond market, where yields have climbed to their highest in a year, some companies are having a more challenging time selling debt. Venture Global LNG Inc., a provider of liquefied natural gas, was able to borrow $4 billion on Thursday only after paying more than initially expected to do so.
Even in the asset-backed securities market, often perceived as relatively low risk because the bonds are secured by assets and are relatively short-dated, Mexican fast-food chain Qdoba Restaurant Corp. had to cut its offering to $305 million from an originally planned $325 million.
And in the loan market, facilities management company BGIS withdrew its $916 million loan from syndication in the first shelved transaction since August. The loan was assigned a B rating and offered at 450 basis points over the benchmark at a discount of 98 cents on the dollar.
The selloff in Treasuries has spilled over to all corners of corporate credit. Treasury yields rose to the highest levels since at least 16 years this week — with the 10-year rate nearing 5% on Thursday — after stronger-than-expected retail sales data stoked concerns that the Federal Reserve has more work to do in slowing inflation. Yields on Treasuries are declining in US trading Friday.
Still, investment-grade yields surging to the highest since 2009 has created opportunities for investors who can stomach the volatility.
Read more: How Rising Rates, US Debt Brought Back Term Premiums: QuickTake
“For a long-term investor the entry level in fixed income is very attractive,” said Benoit Anne, lead strategist at MFS Investment Management. “The spreads in investment grade are not screaming buy but the yield picture is a once in a lifetime opportunity.”
But this may not be good news for issuers, at least while rates volatility persists. Some of the bonds sold this week from the likes of Wells Fargo & Co., Goldman Sachs Group Inc. and JPMorgan Chase & Co. were trading wider than where they priced by Friday, indicating that issuers coming forward next week may have to offer bigger concessions.
Other issuers in the leveraged loan market have also had to sweeten terms to be able to borrow. A group of banks led by Morgan Stanley sold a $2.4 billion loan for Thoma Bravo-backed Qlik Technologies Inc. Thursday after changing the structure and tweaking the documents to make them more investor-friendly.
Even with the volatility, companies are still going to have to refinance in a market with higher rates. The amount of junk bonds maturing in the next 18 to 36 months is at the highest level since 2007, according to strategists at Goldman Sachs.
“Corporate bonds had very little competition from Treasury or mortgage-backed securities for over a decade, but that dynamic has changed dramatically, and quickly, with all three markets offering competitive yields,” Scott Kimball, managing director at Loop Capital Asset Management.
Read More: Blue-Chip Yields Create ‘Golden Age’ For Credit Demand: Barclays
–With assistance from James Crombie, Olivia Raimonde, Caleb Mutua, Michael Gambale and Brian Smith.
(Updates with details on BGIS withdrawing its term loan from syndication in the fourth paragraph.)
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