(Bloomberg) — It is becoming increasingly difficult for riskier corporate borrowers to raise funds.
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As last week’s banking crisis largely halted corporate bond and loan offerings, borrowing costs for junk-rated issuers rose, tipping the market value of some of the corporate debt. more vulnerable to difficulty levels.
The average yield spread – the extra money demanded by investors to hold lower debt – on US bonds with the worst credit ratings exceeded 1,000 basis points. Leveraged loans – the other main financing option for venture companies – plunged to a 10-week low, and companies struck debt deals at the fastest pace in a year as buyers were fleeing.
“When high-yielding companies get some air, they will see much tighter financial conditions,” said Michael Anderson, head of U.S. credit strategy for Citigroup Inc. “It’s a pretty big shock. for the financial system.
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The reassessment of credit risk followed the collapse of US tech lender Silicon Valley Bank and a crisis of confidence in Credit Suisse Group AG that sent the Swiss lender’s investment-grade bonds into distress. Global banking stress has tightened financial conditions so much that the Federal Reserve may not need to raise rates as high as initially expected to suppress inflation, according to Anna Wong, chief U.S. economist for Bloomberg Economics.
Tighter financial conditions have put additional pressure on vulnerable borrowers in sectors like retail, travel and leisure, many of whom are already reeling from rising rates and a slowing US economy. As more deals are made, high-yield companies will need to be more creative in order to access capital.
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“It will be difficult for leveraged companies with capital needs,” said Hunter Hayes, portfolio manager of Intrepid Income Fund at Intrepid Capital Management. “The more junkie issuers will have to sweeten the pot with equity kickers, better security or other incentives to entice lenders.”
A new deal has not been priced in the US high yield bond market since March 2 and there was nothing in the US high yield bond market last week for the first time since June. In Europe, the only junk-priced bond has made it to one of the highest yields in years.
Shockwaves from the banking crisis are reigniting bets on a hard landing for the United States. That doesn’t bode well for those in need of cash, says Scott Kimball, chief investment officer at Loop Capital Asset Management.
“Small businesses and consumers increased borrowing to maintain spending in the face of persistent inflation,” he said. “A tightening in credit markets – which directly affects them – could quickly and significantly alter the outlook for growth.”
U-turn in China
An abrupt suspension of widely used bond price feeds in China without an official explanation has disrupted trading in the 145 trillion yuan ($21 trillion) onshore bond market, forcing desperate traders to turn to chat rooms for sharing prices and making deals, and prompting regulators to urge for market stability. But authorities then quickly reversed course, allowing those bond price feeds to become available again after seeking comment.
The episode drew attention to the risks of unexpected regulatory changes in China, which accounts for a growing share of global fixed income portfolios. Bond prices held steady despite the trading turmoil, with onshore corporate bond spreads continuing to tighten, standing out with other Chinese assets as an oasis of calm amid the turmoil of global markets.
Somewhere else:
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Defaulted Chinese property developers continue to intensify restructuring talks, as CIFI Holdings Group set key preliminary terms for overhauling its offshore debt, and Logan Group Co. said it had started distributing projects restructuring proposals to offshore creditors.
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The former parent of Silicon Valley Bank filed for Chapter 11 bankruptcy in New York a week after a run on filings prompted regulators to seize its banking unit. The broker-dealer SVB Securities and the venture capital arm SVB Capital are not included in the file.
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Japanese companies are choosing bank loans over bonds for their longer-term financing needs as investors – bracing for the end of the easy money era – drive yields higher, wrote Ayai Tomisawa. Japan Airlines Co. has taken out yen borrowing in recent weeks, while brewer Suntory Holdings Ltd. decided to partially refinance a subordinated bond with borrowings.
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Ares Management Corp. is the latest investment manager to build a business by buying stakes in private credit funds from other investors who need quick cash, Silas Brown and Lisa Lee wrote. It’s the latest foray into credit secondaries, a growing area of private markets that has also attracted interest from Apollo Global Management and the asset management unit of JPMorgan Chase & Co.
–With the help of Diana Li and Giulia Morpurgo.
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