Junk-Bond Indigestion Burns Buyers Gorged on Record SalesSridhar Natarajan and Katie Linsell
Junk-bond buyers are showing signs of indigestion after snapping up a record $361 billion of the debt at the lowest yields on record.
Speculative-grade bonds from the U.S. to Europe and Asia are set to post losses this month for the first time since last August after high-yield debt funds suffered the biggest weekly withdrawal of 2014. Winoa SA, the French producer of abrasives for metalworking, scrapped a bond offering in Europe yesterday amid the turmoil.
The pushback is stifling junk-bond issuance in July after an unprecedented first half of sales. Investors who piled into the debt amid extraordinary central bank stimulus and a sixth year of near-zero interest rates in the U.S. are being jolted out of complacency by intensifying risks from Ukraine to Gaza.
“People who were complacent before are going to have their finger on the sell button pretty quickly if some of these situations escalate,” Marc Gross, a money manager at RS Investments in New York, which oversees $5.8 billion in fixed-income assets, said in a telephone interview.
Globally, high-yield, high-risk bonds have lost 0.38 percent this month after recording gains of 11 percent since August, Bank of America Merrill Lynch index data show. That’s curbed the pace of deals with $30 billion of new offerings this month, according to data compiled by Bloomberg. A record $331 billion was sold in the first half of the year.
Average yields on the debt have risen from an all-time low of 5.64 percent in June to 5.84 percent, Bank of America Merrill Lynch index data show.
There is “a whiff of ‘flight-to-quality’ in the market, though we are far short of panic,” analysts led by Michael Contopoulos at Bank of America wrote in a report yesterday. The $2.7 billion of withdrawals from junk debt was led by U.S. funds that reported outflows of $1.8 billion, with exchange-traded funds accounting for more than 60 percent of that, according to the report.
“There has been a noticeable shift in sentiment as investors evaluate whether flows are a short-term blip or the beginning of a broader trend,” Michael Sohr, a New York-based money manager at AllianceBernstein, said in a telephone interview. “We’ve got increased geopolitical risks. Perhaps some investors believe it is a good time to take some chips off the table.”
Among the worst-performing junk bonds sold by non-financial companies in Europe, securities from British processed-food maker Boparan Holdings Ltd. and department-store chain Debenhams Plc dropped about 4 pence on the pound since they were issued.
The crisis in Ukraine escalated after a Malaysian Airlines passenger jet crashed, killing all the people on board last week. The government in Kiev blamed pro-Russian rebels for shooting down the plane, while the separatists deny the accusation. Israel sent troops into Gaza last week and it has been bombarding it for more than two weeks.
“There’s a perception of an increase in global risk,” Gross said. “There are a lot of mediocre bonds that have come in the last year, and you don’t want to be caught with some of the less desirable stuff.”
Winoa, owned by a consortium led by KKR & Co., pulled a sale of 260 million euros ($350 million) of six-year senior secured notes, according to a person familiar with the matter. The company, which planned to use the money to refinance loans, may return later this year, the person said. A Winoa official, who asked not to be identified citing company policy, declined to comment on the decision to pull the bond sale.
Earlier this month, Sunshine Oilsands Ltd. of Canada pulled a $325 million bond because of lack of demand. In the U.S., sales of the debt were $20 billion in July after companies borrowed at a record pace of $197 billion in the first half of the year.
Italian fashion brand Twin Set-Simona Barbieri SpA had to increase the period during which it won’t redeem its debt to 18 months from 12 months before it sold 150 million euros of floating-rate notes on July 15. The company, owned by Washington-based private equity firm Carlyle Group LP, planned to use some of the proceeds to pay a shareholder dividend.
“The market has indigestion,” said Henry Craik-White, a senior investment analyst at ECM Asset Management, which oversees $8 billion. “People are cautious and the market is seeing outflows. I’m noticing investors paying more attention to terms on deals and feeling more confident to express their view when they don’t like something.”