“It is a company that is struggling to make money and the coronavirus is not going to help it recover,” said Jonathan Rochford of Narrow Road Capital.
“The Virgin listed notes are highly contingent – it’s a business you don’t want to lend to and it’s part of a pool of capital you don’t want to be in,” he said. .
Virgin is one of a multitude of companies considered particularly vulnerable to the slowdown in travel due to the virus epidemic.
While the stock markets experienced their largest weekly decline since 2008, the riskiest parts of the credit markets were also affected.
In the United States, spreads on low-quality or high-yield bonds jumped 3.6% last week from the 5% government bond rate.
This is only the highest level since January 2019 and corporate borrowing costs remain at historically low levels even after last week,
But analysts say the markets may still be underestimating the pressure on some companies’ cash flows, even as central banks prepare to react.
“Monetary policy is not the savior, but it can help improve market sentiment,” said Nick Ferres of Vantage Point, who has been buying credit default insurance for several months.
“The key point here is that the ability to repay debt depends on cash flow and is not just a function of the lower discount rate. While lower interest rates can help, cash flow are necessary to service the debt. “
While investors in corporate debt have expressed concerns about certain sectors such as travel and energy, as oil prices have fallen below levels deemed profitable by some traders, they have warned against comparison of sales to previous crises.
Rochford said that last week’s developments in credit markets are “nothing like the global financial crisis so far” and that corporate debt spreads are still “bottom of the line” ‘a comfortable fork “.
Accumulation of bad loans
Over the long term, yields on US high-yield bonds are generally between 5 and 10% and, at 5%, they remain below historical averages.
“The question is where are things going from here. There is a lot of global debt that has been lent without a solid credit rating in various sectors,” said Rochford.
“Like the GFC, there is an accumulation of bad loans, so if the situation accelerates, many debt investors will suffer unexpected losses.”
Credit market disruptions have forced a wave of borrowers around the world to cancel or delay bond sales.
In Australia, New Zealand lender Avanti Finance has been forced to delay its sale of Australian dollar bonds “due to market volatility”, saying it would revisit the sale when conditions stabilize.
The company has a quality rating below BB and was selling a sale of $ 25 million bonds over five years at an interest rate of between 5 and 5.25%.
A billion dollar sale of mortgage-backed bonds by non-bank lender Columbus Capital was completed while Australian banks were able to issue commercial paper in the United States.
Bank spreads remain low
Mr. Ferres of the Singapore Vantage Point fund has been buying credit default swaps from major Australian banks for several months as protection.
The cost of insurance against default on the senior debt of a large Australian bank increased 40% this week, from 27 to 40 basis points. (In other words, the cost of insurance against defaulting $ 10,000 on Australian senior bank bonds has gone from $ 27 to $ 40).
But this level is around the average cost over the past 12 months and is much lower than the five-year peak of 140 basis points reached in February 2016.
Ferres said that even after last week’s widening of credit spreads, the markets still did not reflect the obvious panic in the stock markets.
“The VIX [equity] the volatility index closed around 40 points, which corresponds to a high yield spread of 10%. “