(Bloomberg) — The junkiest corporate bonds are becoming increasingly risky for investors as signs of a default cycle gaining momentum.
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Thames Water's holding company defaulted on a 400 million pound ($504 million) bond payment that was due this week. This comes after Altice France's bond prices plunged last month after management told investors they needed to take part in “discount transactions” to help reduce Altice France's debt. .
As a result, investors are penalizing CCC-rated bonds even as bond spreads widen and benchmarks tighten. Over the past two weeks, additional yields on Europe's riskiest government bonds have reached their highest levels since the coronavirus outbreak shut down entire industries and intensified the eurozone debt crisis more than a decade ago. In the United States, the spread is less dramatic, but it's still happening.
For years, asset managers bought bonds in the lowest range to boost returns because cheap money from central banks made it less likely that companies would default. Some companies are starting to struggle as they have to refinance their debt at significantly higher levels following the fastest rate hike in decades. As a result, the threat of haircuts is growing for bond investors.
“There's going to be some pain going forward,” said Rafael Tuin, head of capital markets strategy at Tikehau Capital. “The conventional wisdom is that it takes 18 to 24 months for rate hikes to take effect. We're at that point now.”
The Bank of England said last week that the risk of widening credit spreads had increased since the final quarter of last year, making it “more difficult to lend to riskier companies,” as the central bank disappointed market expectations for a deep interest rate cut this year. “There is a possibility that it will happen,” he warned. They are particularly vulnerable to a significant deterioration in investor risk sentiment. ”
This poses a potential problem for borrowers, given that Europe's other traditional lenders, banks, significantly slowed the growth rate of corporate loans last year. Fitch Ratings expects the region's high-yield default rate to rise to 4% this year from 1.7% in 2023 due to leverage, debt maturities and weaker performance.
One notable feature of the CCC crash in Europe and the US is that spreads between higher-rated categories of high-yield bonds have widened as investors piled into junk while avoiding the riskiest categories. The fact is that it remains relatively narrow.
“CCC has been a huge underperformer,” Steven Faughn, head of global credit at Amundi Asset Management, said on the Bloomberg Intelligence Credit Edge podcast this week.
Indeed, debt rated below CCC only accounts for 8% of Europe's junk index, according to Bloomberg Intelligence, suggesting the problem is not widespread.
“Even in the worst-case scenario, where all credits rated CCC and below default, the junk index default rate would still not exceed 2.4%,” said Heema Patel, credit strategist at Bloomberg Intelligence. “So the CCC index looks a little oversold.”
Recent downgrades
Still, Altice France SA and landlord Samholesvignazboraget y Norden AB have been downgraded to the CCC bucket in recent weeks, and Thames Water owner Kemble Water Finance Ltd.'s rating has been further downgraded. Ta.
“After 10 years of free money and negative interest rates, some capital structures have become unsustainable,” said Nicolas Julien, high yield portfolio manager at Candium SA.
Click here to listen to a podcast on how Amundi expects AT1 bonds to grow profits.
1 week review
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Investors have poured money into U.S. leveraged loan funds this year with strong confidence that interest rates will fall slowly and that junk-rated U.S. companies will be able to withstand pressure from rising borrowing costs. is accelerating the biggest rise in the credit market.
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Last year, KKR & Co.'s contrarian bet that leveraged bonds would outperform investment-grade bonds paid off as recession fears receded and rising interest rates weighed on high-quality bonds.
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CVC Credit Partners' secured loan debt has returned 146% on a bet by former British Prime Minister Liz Truss that the leveraged loan market will recover from the volatility associated with the disastrous 2022 mini-budget.
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Thames Water's creditors have begun organizing ahead of potential restructuring talks after the parent company defaulted on its debts.
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Apollo Global Management is in talks to provide debt financing to support Saks Fifth Avenue's potential acquisition of rival Neiman Marcus.
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Telestream, backed by Genstar Capital, is seeking to raise approximately $400 million in new financing from direct lenders to pay down existing debt.
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Enbridge sold $3.5 billion in bonds on Tuesday following last week's downgrade by Moody's Ratings.
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Direct lending funds have struggled to raise cash from their own investors, raising concerns that red-hot private credit markets could cool.
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Barclays and AGL Credit Management have partnered to tap into the fast-growing $1.7 trillion private credit market with support from the Abu Dhabi Investment Authority.
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Companies are issuing record amounts of renminbi-denominated bonds outside of China, seeking to take advantage of the low cost of borrowing in the currency.
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Ellington Management Group's fund, which buys mortgage debt, has returned about 24% through January since early 2023, when the Federal Reserve's interest rate hike cycle ends.
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Property group Around Town SA is proposing to replace some old hybrid bonds with new bonds to restore its stock valuation and support its credit rating.
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Herbalife Inc. sold $1.2 billion in high-yield bonds and leveraged loans after doubling yields and adding lender-friendly safeguards to attract enough participation.
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Discount retailer 99 Cents Only Stores LLC has announced plans to scale back its business operations.
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Acorda Therapeutics, which makes drugs to treat neurological disorders, has filed for Chapter 11 bankruptcy protection with plans to sell its assets to another pharmaceutical company for $185 million.
move
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Patrick Dowd, head of credit at Viking Global Investors, has left the hedge fund after three years.
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Northern Trust Asset Management has appointed Christian Ross as Chief Investment Officer of Global Fixed Income.
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Rothschild & Company Managing Director Stephen Berger has left the firm to join Raymond James Financial.
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SMBC Nikko Securities America has promoted Dolph Habeck to head of the Sustainable Solutions Team, effective April 1.
–With assistance from Helene Durand, Bruce Douglas, and Alex Nicholson.
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