With volatility reverberating through global capital markets over recent weeks amid concerns over slowing economic growth and a divisive geopolitical climate, lesser-known bond issuers are facing an uphill battle to complete new deals in the market, according to five buysiders and two sellsiders.
While recognizable issuers such as Transocean, Netflix, United Rentals and Anixter have been able to price drivebys, companies such as HC2 Holdings and Vector Group have been forced to widen pricing expectations, while GFL Environmental and INTL FCStone have pulled bond deals from the market entirely.
“These [issuers] knew that it wasn’t going to be cheap to come to the market, regardless of market conditions,” said one buysider. “Then, they came at a time when yields are higher, spreads are widening and equities are down. So it’s like a perfect storm.”
US speculative grade bond yields have now risen roughly 100bps this year to 6.83%, according to the ICE BofAML US High Yield Index. While analysts noted that a portion of that increase was down to widening Treasuries, more than 60bps of if has come in October amid a selloff in equities.
The Dow Jones Industrial Average and S&P 500 indices bounced 3.5% and 2.5%, respectively, off of lows achieved within the last week amid some improving signs from corporate earnings, but are still down 5.5% and 6.9% for October.
Oil prices have also dropped, hurting new bond deals from the likes of oilfield servicer KLX Energy Service and onshore driller GEP Haynesville. After peaking at USD 76 per barrel at the beginning of October, WTI is now trading in the USD 66-67 range.
“When equities started melting down two weeks ago, everyone knew and expected that oil would be affected just because it’s a risky investment,” one of the buysiders said. “Now, the risk is multiplied with the trade restrictions, the speculation in Saudi Arabia and so many other macro things.”
KLX Energy Service ultimately priced its B3/B USD 250m senior secured bond due 2025 at 11.5%, as the newly spun-off company grappled with market conditions and recent supply from other energy services issuers.
Meanwhile, GEP Haynesville pulled its B3/B USD 600m senior unsecured bond offering due 2023—its debut deal—more than a week after it launched, according to a Bloomberg report today.
Investors expected yields to tick up as the Fed increased rates, but the Fed’s tightening of monetary policy has intersected with the midterm elections, geopolitical tensions, and increasingly cautious forward earnings guidance from US corporations, the sources said.
Some investors are waiting for Election Day to come and go before diving into new issuance, amid chances of a shake-up in Congress, two buysiders said.
“If Dems take control of either house, the tension could lead to gridlock in Washington,” a second buysider added. “Neither party will be able to get anything done, and with the market as fragile as it is, that could be a cause for a bear market.”
Many of the recent deals in high yield have also been smaller in size and from smaller companies. That has driven concerns about liquidity, said another buysider.
“In a situation where we’ve seen such big moves downwards, we’re still searching for a bottom and liquidity is starting to be a big concern,” said the buysider. “With these smaller and less liquid deals, people need more clarity than we currently have.”
The average size of HY bonds in the past two weeks of October is USD 536m, with the majority under USD 400m. Of those smaller deals, only one—Anixter—has priced tighter than 10%.