Dozens of corporate bond issues have been shelved now that the U.S. Federal Reserve is no longer greasing the bond market with rock-bottom interest rates, the Financial Times reported.
For example, Europcar, a French car-renting firm, sought €150 million in bonded debt to refresh and expand its vehicle fleet. However, the company’s board pulled the bond issue as potential investors demanded ever-higher yields.
Although bond issues are rarely yanked from the market once bankers have begun selling them, the number of deals canceled in June has tripled across Africa, Europe, and the Middle East compared to May, Bloomberg data shows.
“There have probably been more transactions withdrawn from the market in the last three months than in the last three years,” Mark Lynagh, co-director of European debt for BNP Paribas, told the Financial Times.
Fund managers are demanding higher yields on bonds because interest rates are rising steadily across much of the world and because inflation persists, worsened by the Ukraine war and resulting Western sanctions.
However, corporations have been lulled by years of artificially cheap money, courtesy of the Fed, and are not yet ready to accede to paying sharply higher interest on conventional bonds, the FT said.
“Bankers say ultimately, companies will have to learn to live with pricier debt,” the FT noted.
“It used to be child’s play,” one banker commented to the FT.
“You would put a deal out there, the European Central Bank [ECB] would come in with a massive order, and everyone else would pile in,” the banker said.
“Now, the market is already contending with inflation and interest rates,” the banker added. “Then there’s the Ukrainian war, the Bank of England wanting to sell down its corporate bond portfolio, and the ECB asset purchase program finishing.
“It’s the worst possible time for all these things to be happening together.”
Through its virtually automated COVID-era bond-buying program, the ECB amassed €345 billion worth by 30 June, compared to €195 billion in bonds before the virus arrived.
Fueled by the ECB’s largesse, corporations piled up $1.2 trillion in debt through Europe’s bond market in 2021, data service Refinitiv reported.
Now the market is choosier and many corporations will be left out.
“In an amazing market,” the ECB’s absence would add a fraction to the cost of debt, Will Weaver, head of European debt capital at Citi, commented to the FT.
However, with the ECB sitting out the purchase of new debt, the difference is perhaps half a percentage point or more in interest “or maybe the deal doesn’t get done,” he said.
JPMorgan and Morgan Stanley recently marketed £1 billion worth of bonds to finance gambling company 888’s purchase of William Hill’s European business.
The banks discounted the bonds’ price to investors, taking the price cut out of their fees for structuring the deal, and offered 11.5 percent interest “and still struggled to woo buyers,” the FT said.
Worldwide, the value of new corporate bond issues dropped 17 percent in the first half of this year compared to last, Refinitiv data shows.
New high-yield or “junk” bond issues were 78 percent fewer, falling to their lowest number since 2009 during the Great Recession.
Now that the ECB has closed its wallet, the fear of not taking advantage of cheap money has been replaced by the fear of stumbling in a shaky market, the FT said.
“Companies don’t want to take the risks,” another banker told the FT. “If you’re a CFO or treasurer and you get board approval [for a bond issue] and then you pull the bond, it doesn’t look good for you or your company.”
TRENDPOST: An endless supply of cheap money has allowed corporations to borrow at will and many did.
A tighter bond market will allow those companies to bring equilibrium back to their balance sheets and focus on shepherding themselves through a slowed global economy instead of thinking about expansion.
Many corporations that borrowed steadily just to survive—among them the so-called “zombie corporations” that we detailed in “Zombie Companies Stalk Europe’s Economy” (22 Sep 2020) and “Reckoning Day for the Living Dead” (7 Jun 2022)—will be taken over at bargain prices or allowed to die.