Bond investors globally are clamoring for yield, but they’ll only take so much risk to get it.
Case in point: U.S. Xpress Enterprises Inc. scrapped its $320 million bond offering late Wednesday after investors, concerned that growth is slowing in the trucking industry, pushed for higher yields on the securities. It was the first pulled deal in the junk-bond market in two months.
The trucker had been looking to take advantage of a credit-market rally, improving earnings and better credit ratings to refinance debt at more favorable terms, the company said in an e-mailed statement Wednesday. “Feedback concerning trucking industry dynamics, as reflected in public company earnings announcements, caused the company to conclude that a superior transaction is not likely,” it said.
Bond buyers resisted the company’s initial yield offer of about 9 percent last week, prompting it to boost the rate to about 11 percent for the eight-year notes, people with knowledge of the matter said earlier.
Junk bonds have surged since February, but may be showing signs of leveling off. Average borrowing costs have hovered at about the 7 percent mark since July 12, according to Bank of America Merrill Lynch indexes, as a chorus of caution rings through the markets.
Investors will only take so much risk, said Ricky Liu, a money manager at HSBC Global Asset Management.
Demand "is concentrated in the better segment of high yield," Liu said. "So if it’s not a well-known name or lower quality stuff or they have any concerns about the segment, investors are going to be cautious around that."
Valvoline Inc., a name-brand oil-change store operator, received about $4.5 billion in orders for its $375 million bond sale last week. Moody’s Investors Service graded the bonds at Ba3, the third-highest junk rating, while S&P Global Ratings had them at B+, one step lower.
A rush for yield has brought gains of more than 12 percent in junk bonds this year. The price of oil has rallied more than 70 percent since mid-February, which has lifted debt prices for energy issuers. And there are now more than $10 trillion of bonds globally with negative yields, mostly in Japan and Europe, which has spurred many investors to seek higher returns in riskier securities.
The past quarter has been challenging for truckers due to “sluggish economic growth, bloated inventories, spot market weakness and an unfavorable fuel surcharge,” according to a Bloomberg Intelligence report dated July 11. The company has been graded B2, or five-levels below investment-grade by Moody’s Investors Service. S&P Global Ratings ranks it one level higher at B+.
U.S. Xpress said its existing financing remains “attractive and flexible.”
Pennymac Financial was the last company to cancel a U.S. corporate bond sale, when it postponed a $300 million offering in late May citing market conditions, according to data compiled by Bloomberg.