Credit markets suffering from indigestion
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A flurry of European and US debt sales earlier this month has left companies facing a higher price of funding as capital markets suffer indigestion.
Hefty debt sales during September pushed Moody’s Baa credit average yield above 5.40 per cent last week, the highest level since late in 2013 and the measure remained elevated on Monday at 5.31 per cent.
To attract investors to buy new debt rather than the bonds available on the secondary market, the new issue must have a premium attached, which in turn then leads to a repricing of outstanding debt.
“New issue supply has been challenging to digest,” said Marc Tempelman, Emea co-head of debt capital markets for Bank of America Merrill Lynch.
He added investors are taking a wait-and-see approach given the uncertainty over when the Federal Reserve will tighten interest rate policy and against a backdrop of decreasing secondary market liquidity.
An extended period of volatility in the summer months in Europe delayed the pricing of some deals until September and at the same time speculation that the Fed would raise interest rates led other borrowers to bring forward deals.
So far this month, investors in the US have absorbed $60bn of new investment grade bonds, with companies in Europe selling around €60bn, according to data from Thomson Reuters.
“September looks on course to be the heaviest month for supply so far this year,” said Citi’s Joseph Faith and Aritra Banerjee in a recent note on European investment grade.
The deluge of supply has hit investment performance and resulted in a higher risk premium, or extra yield between more risky corporate bonds and those of safer government bonds.
“The credit market has really been a fairly miserable place to be for some time now,” said Owen Murfin, portfolio manager on the BlackRock Global Bond Portfolio Team. Investors have struggled to absorb the new supply into the market he said, especially with low yields on offer failing to attract retail money.
Corporate issuers have been rushing to take advantage of cheap borrowing costs while they last and more debt is expected to be issued to help fund a wave of mergers and acquisitions such as the potential megamerger between AB InBev and SABMiller.
Henry Peabody, a US-based portfolio manager at Eaton Vance said: “Issuers likely see the delay in Fed lift-off as an extended window to bring deals, and they will not look a gift horse in the mouth.”
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