Riskiest corporate borrowers left in lurch by bank mayhem

It’s getting harder for the riskiest corporate borrowers to raise cash. 

As the banking crisis this past week largely brought corporate bond and loan offerings to a halt, borrowing costs for junk-rated issuers surged, tipping the market value of debt for some of the most vulnerable companies into distressed levels.

The average yield spread – extra money investors demand for holding weaker debt – on US bonds with the worst credit ratings vaulted past 1,000 basis points. Leveraged loans – the other main financing option for risky companies – plunged to a 10-week low, and companies pulled debt deals at the fastest pace in a year as buyers fled. 

“When high-yield companies come up for air, they are going to see much tighter financial conditions,” said Michael Anderson, head of US credit strategy for Citigroup. “This is a pretty big shock to the financial system.”

Repricing of credit risk followed the collapse of US tech lender Silicon Valley Bank and a crisis of confidence in Credit Suisse Group that tipped the Swiss lender’s investment-grade bonds into distress. Global banking stress has tightened financial conditions so much that the Federal Reserve might not need to raise rates quite as high as initially expected to suppress inflation, according to Anna Wong, chief US economist for Bloomberg Economics. 

Tighter financial conditions put additional pressure on vulnerable borrowers in sectors like retail, travel and leisure, many of which are already reeling from rising rates and a slowdown in the US economy. As more deals get pulled, high-yield companies will have to get more creative in order to be able to access capital. 

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“It’s going to be tough sledding for levered companies with capital needs,” said Hunter Hayes, portfolio manager of the Intrepid Income Fund at Intrepid Capital Management. “The junkiest issuers will have to sweeten the pot with equity kickers, better security, or other incentives to attract lenders.”

A new deal hasn’t priced in the US high-yield bond market since Mar 2 and there was nothing in the US high-grade market last week for the first time since June. In Europe, the only junk-rated bond to price did so at one of the highest yields in years.

Shock waves from the banking crisis are reviving bets on a hard landing for the US. That doesn’t bode well for those that need cash, says Scott Kimball, chief investment officer at Loop Capital Asset Management.

“Small business and consumers alike have increased borrowing to maintain spending in the face of persistent inflation,” he said. “A tightening in the credit markets – which directly affects them – may quickly and meaningfully reshape the growth outlook.”

An abrupt suspension of widely used bond price feeds in China with no official explanation disrupted trading in the nation’s 145 trillion yuan (S$28 trillion) onshore bond market, forcing desperate traders to turn to chatrooms to share prices and do deals, and prompting regulators to urge for market stability. But authorities subsequently made a fast U-turn, allowing such bond price feeds to be available again after soliciting feedback.  BLOOMBERG