Credit Market Fueled by Firms Hoarding Cash for Earnings Slump

(Bloomberg) -- A global debt funding bonanza is quickening as the new quarter gets underway, with firms including Tiffany buyer LVMH and Spain’s Iberdrola (MC:IBE) SA joining the busiest day in Europe’s bond market since January.

Seventeen borrowers are offering new debt in Europe on Wednesday, the most since Jan. 21 and adding to the more than $85 billion already raised globally this week. Companies around the world sold at least $752 billion of bonds last quarter, building up their defenses against collapsing earnings caused by the coronavirus pandemic.

“We expect issuance to continue as corporates look to bolster liquidity,” said Henrik Johnsson, co-head of capital markets at Deutsche Bank AG (DE:DBKGn). “The long term effect of all this debt is hard to quantify.”

Issuing debt in the current environment comes at a price, however.

The yield premium over low-risk treasury debt on euro-denominated investment-grade company bonds stands at 239 basis points, close to the highest since 2012. Average spreads on Asian high-grade dollar bonds jumped 179 basis points in the first quarter, the most ever recorded on a Bloomberg Barclays index going back to 1989.

Cruise ship operator Carnival (NYSE:CCL) Corp is offering to pay a coupon as high as 12.5% as it seeks to raise $6 billion in new debt in a deal launched on Tuesday. The sale was originally structured with a euro-denominated tranche, before the company decided to scrap the non-dollar portion.

With the virus causing devastation to the cruise ship industry, Carnival’s senior unsecured debt rating was cut two notches to Baa3 by Moody’s Investors Service overnight. S&P Global also recently lowered Carnival’s corporate ratings.

“Companies are worrying about a collapse in revenue so they need to borrow more to pay for operational expenses,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “The expectation of lower income and higher funding costs are pushing companies to issue more.”

Borrower binge

LVMH Moet Hennessy Louis Vuitton SE is offering euro notes due in five years at about 155 basis points above midswaps on Wednesday. Less than two months ago, it paid less than a fifth of that for 1.25 billion euros ($1.4 billion) of six-year notes.

Absolut Vodka maker Pernod Ricard (PA:PERP) SA is offering euro notes due in five and 10 years, with the shorter tranche offered at 180-185 basis points above midswaps. That’s about triple what it paid to sell euro eight-year notes in October.

Massive stimulus measures from central banks and governments around the world have helped slow a broader sell-off across risk assets in recent weeks and eased credit spread widening. But risks still abound, not least for money managers who have been bargain hunting in recent days.

One indicator continuing to show serious concerns for the global economy is oil, which posted the worst quarter on record. The rout has sparked a flurry of corporate and sovereign downgrades from Halliburton (NYSE:HAL) Co. to Mexico.

“We see rising default risks given slowing growth and the collapse in energy prices,” said Charles Macgregor, head of Asia at Lucror Analytics, an independent research firm based in Singapore. The broader record bond bonanza shows “wanton investor appetite” amid all the lingering risks, he said.

Europe

• Seventeen deals are being marketed on Wednesday in the primary market’s busiest day for more than two months. It follows the best-ever quarter for debt sales, with more than 510 billion euros priced, mainly reflecting huge volumes at the start of the year
• U.S. firms sold about 40 billion euros of single-currency bonds in the opening quarter, the most in five years, led by a near-tripling of issuance from financial firms including Goldman Sachs Group Inc (NYSE:GS).

• Spreads on euro IG company bonds remain elevated but have fallen about 8 basis points from multi-year highs reached on March 24, according to a Bloomberg Barclays (LON:BARC) index
• European banks may get more time to meet loss-absorbing debt targets, the euro-area’s Single Resolution Board said. It’s ready to adapt transition periods and interim targets to help them deal with the coronavirus fallout

Asia

• The rebound in global bond sales in recent weeks has so far eluded Asia. After record issuance in January, sales of dollar securities by the region’s issuers, including financials and sovereigns, sputtered in the first quarter, totaling about $86 billion, up only about 3% on the year-earlier period
• One reason for that is that unprecedented stimulus from the Federal Reserve and European Central Bank has had more direct benefits in the U.S. and European markets
• Another factor is that Asian companies have been able to tap local-currency markets. Chinese companies sold a record amount of domestic bonds in March, for example, after Beijing flooded markets with cash
• But there have been signs in recent days that more borrowers may offer dollar debt. Chinese tech giant Baidu Inc (NASDAQ:BIDU). was marketing an offering Wednesday
• Spreads on top-rated Asian dollar bonds were 10-20 basis points wider Wednesday, according to traders. They ended the first quarter 146 basis points wider, the worst blow-out in a Bloomberg Barclays index going back to 2009

U.S.

• A flurry of deals in the U.S. came just days ahead of what’s expected to be another record number of jobless claims -- claims that very likely could come from former employees of Carnival and the like, which had to lay off thousands of workers as the pandemic halts global travel
• The primary market continued to encourage riskier borrowers to come forward, after YUM! Brands successfully reopened access to high-yield companies Monday
• Thirteen deals combined to price just over $13 billion on Tuesday, pushing the total for March to a new monthly record
• KKR-backed Envision Healthcare, a services provider, fully tapped its revolving credit facility, and said the impact from the pandemic over the past two weeks could result in losses

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