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Banks breathe life into scrapped bond sales in red hot market
MONEY managers are clamouring to buy all the corporate bonds they can in the US and Europe, giving banks a second chance to bring to market deals that were previously scrapped.
European high-yield bond sales have reached almost 10 billion euros (S$15.1 billion) in November, the busiest month on record, according to data compiled by Bloomberg.
In US high-yield, the market is on pace for its busiest November for bond sales since at least 2005. For US investment-grade sales, issuance this month was on track to be up about 40 per cent from the same period last year as of Tuesday.
The strong market allowed Mattel Inc, a toymaker, to sell US$600 million of bonds to refinance debt on Monday, after a whistleblower complaint forced it to yank a smaller debt sale in August. Jaguar Land Rover Automotive, Britain's biggest automaker, is returning with a bond sale after stepping back in February.
Companies are looking to take advantage of one of the last opportunities they'll have to sell debt this year before next week's US Thanksgiving holiday and the December slowdown. Borrowing now represents a chance to lock in super-low debt costs before simmering risks such as Brexit and trade wars potentially lift them again.
"There is an element of 'get it done this week or wait for the new year'," said Luke Hickmore, a money manager at Aberdeen Standard Investments, which oversees US$669 billion.
In Europe, investment-grade bond issuers that had been sitting out the market have also been able to come back. Nykredit Realkredit and CNP Assurance have pushed through previously delayed euro sales.
Investors buying company bonds now are hoping to earn higher yields than government debt offers, as fears about slowing global economic growth start to lift. Signs that the US may be moving closer to a trade agreement with China helped lift US stocks to a record high on Monday. Equities have since given up some of those gains after a report signalled that the pact may be delayed.
Those kinds of see-saws underscore why investors aren't welcoming every bond sale, particularly in the riskier end of the high-yield spectrum. Money managers are demanding double-digit yields on deals they perceive as more difficult - for example, those from companies that have too much debt, or are potentially more vulnerable to slowing economic growth.
When a group led by Bank of America Corp tried to sell debt financing a buyout of Wesco Aircraft Holdings Inc, potential investors demanded that the banks buy a risky US$100 million bond that won't pay interest for eight years. That note is designed to reduce the company's near-term interest burdens, according to people with knowledge of the matter. The US$525 million of unsecured bonds that helped finance the buyout were sold at a 13.76 per cent yield, one of the highest seen this year.
Central banks' expansion of the money supply has helped drive yields low globally. US junk bonds yield just 5.8 per cent on average, compared with an average of 6.7 per cent over the last decade, according to Bloomberg Barclays index data. For investment-grade euro notes, yields average just 0.5 per cent.
"The whole notion of a recession has been pushed back a bit, and rates have rallied. It's a great time for corporate treasurers to issue bonds," said Greg Zappin, a money manager at Penn Mutual Asset Management, which oversees US$27.6 billion.
At least some of the companies that have sold debt have become less hairy since their last effort. Luxury-car maker Jaguar may offer a benchmark-sized transaction on Thursday, after being shut out of the market for more than 10 months. The automaker is offering the notes on the heels of positive results and since it started looking for partners to help develop electric vehicles with, and to help it save on costs.
Mattel's bond sale came after it said last month that it had completed an internal investigation and would restate some of its earnings. The whistleblower complaint concerned its accounting and internal controls.
"Clearly, a lot of issuance is getting done at the moment ahead of year-end," said Ian Robinson, head of Credit EMEA at BMO Global Asset Management. BLOOMBERG