Credit Market Turmoil Crimps Bond Sales in Worst Start Since '05

Bond sales by companies worldwide slowed to an 11-year low in January as investors shunned risk amid a meltdown in capital and commodities markets.

About $333 billion of debt has been issued so far this month, the least for a January since 2005, when $299 billion of securities were sold, according to data compiled by Bloomberg. That’s despite the biggest day ever for bond sales in the U.S. on Jan. 13 when Anheuser-Busch InBev NV sold $46 billion of bonds to fund its takeover of SABMiller Plc. The deal was the second-largest dollar-denominated debt deal on record.

"It’s like the Emperor has no clothes -- the world is not as rich as it thought it was," said Eden Riche, the London-based global head of high-yield and emerging-markets syndicate at ING Bank NV. “There are a number of factors coming together all at once -- deflating global asset bubbles, the collapse in the commodity market, China slowdown, and concerns that the Federal Reserve will raise rates too quickly. It’s created the perfect storm.”

Since the U.S. central bank raised rates last month, a rout in Chinese equities has fueled concern that a slowdown there would spread to the global economy. The Standard & Poor’s 500 stock index has since plunged 6.8 percent, oil prices have declined 20 percent over the same period and junk bonds have lost about 1.8 percent. January is on track for the slowest month for initial public offerings on U.S. exchanges since December 2008, when no companies filed to raise shares after the bankruptcy of Lehman Brothers Holdings Inc.

Corporate note issuance in China may grow at a slower pace this year, as the world’s second-largest economy expands at the weakest pace in a quarter century, according to Tang Lingyun, deputy head of global markets at Industrial & Commercial Bank of China Ltd. Firms in industries with excess capacity will face difficulty in raising debt financing as investors shun lower-rated securities, Tang said.

Record Demand

Bond investors who gobbled up $29 trillion of corporate debt since the financial crisis have mostly avoided all but the highest-quality issuers. AB InBev received a record $110 billion of investor orders on its offering, allowing it to tighten yields from initial guidance enough to shave about $100 million in potential annual interest costs.

The outlook for high-yield debt is particularly bleak. Jeffrey Gundlach, the chief investment officer of DoubleLine Capital, who has warned of a recession in the U.S., said Monday that issuance of the riskier debt will probably collapse amid rising yields and a slowing economy. JPMorgan Chase & Co., the biggest underwriter of corporate bonds last year, revised its 2016 forecast for the speculative-grade default rate for the second time this month to 6 percent from 4.5 percent.

Wider Spreads

"Corporate bond spreads have moved wider in response to increasing global risk," said Scott Kimball, a Miami-based senior portfolio manager at Taplin Canida & Habacht, part of BMO Global Asset Management, which oversees $237 billion of assets. "That’s raised the cost of capital, which on one side can dampen the appetite for additional borrowings from corporations, but is also a sign of some risk aversion for corporate-bond investors. The conditions may not be such that everyone is willing to add risk in the amount that companies may need."

After reaching an all-time low of 2.4 percent in April, yields on bonds of companies from the U.S. to Japan rose to a one-year high of 3.1 percent in December, according to Bank of America Merrill Lynch indices. The extra interest investors demand to hold bonds of U.S. companies above government debt rose to a three-year high of 1.98 percentage points this month.

The longest-dated portion of AB InBev’s debt sale was $11 billion of 4.9 percent bonds maturing in 30 years that yielded 205 basis points above benchmark securities. While that was down from an initial offer of 225 basis points, it’s still a 48 basis-point premium, compared with the yield on bonds of similar maturity and rating, according to Bank of America Merrill Lynch Indexes.

Elevated Premiums

"Both investors and borrowers need to accept elevated new-issue premiums, compared to what they might have expected earlier," said Christian Reusch, co-head of global syndicate at UniCredit SpA. "The perception of fair value needs to be conveyed to investors. Obviously that is likely to take some time, maybe even throughout 2016."

Companies worldwide may need to sell more than $280 billion of investment-grade corporate debt in 2016 to fund acquisitions, up from a record $258 billion last year, according to an estimate from Barclays Plc that excludes financial companies. After the AB InBev deal, some of the year’s biggest debt offerings could come from Dell Inc., Anthem Inc. and Newell Rubbermaid Inc. to fund recently announced buyouts.

"There is a lot of pent-up issuance coming potentially if the market environment improves again," according to Ben Emons, a portfolio manager at Leader Capital Corp. "The moment the market rallied people tried to issue quickly. If we were to continue on that path, a lot of issuance that was planned for January will come on line again -- financials, investment-grade, even some high-yield will try to access the market."

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