Surging borrowing costs, vanishing buyers: more pain
ahead for European junk bonds
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[March 17, 2020] By
LONDON (Reuters) - Borrowing costs for
junk-rated European companies have nearly tripled in less than a month,
and with the market for new debt issuance shuttered, there could be a
lot more pain in store for firms needing to raise fresh money to redeem
The yield on the iBoxx euro liquid high-yield index, which tracks 250
corporate bonds with sub-investment grade ratings, spiked to a
seven-year high on Monday of just over 7%, according to Refinitiv data.
On Feb. 20, when the spread of coronavirus was just starting to spook
investors, the average yield on the index was 2.69%, less than 100 basis
points off record lows set in 2017.
Now, just halfway through March, the yield is on course for its biggest
monthly rise since October 2008, when markets were dealing with the
effects of investment bank Lehman Brothers' collapse.
(Graphic: Junk borrowing costs spike,
Many individual issues are faring even worse -- yields on 2027
subordinated bonds from Legoland owner Merlin Entertainments have shot
up to nearly 10%, up more than 6 percentage points in three weeks,
according to Tradeweb.
But even these levels may not tell the whole story. With liquidity
drying up in these riskier assets, funds trying to offload any sizeable
holdings are having to sell at lower prices than quoted on trading
platforms, market players said.
"What we're hearing is that, what we're seeing on the screens, that's
just indicative," said an official at a high-yield debt syndicate at a
There is likely more to come, with Deutsche Bank revising targets for
the European high-yield market on Monday to recession levels at a spread
of over 1,000 basis points.
That will exacerbate stress for asset managers in the sector -- JPMorgan
said European high-yield funds it tracks have lost close to 6% of their
assets in the past two weeks, with outflows topping 4 billion euros.
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Traders work at Frankfurt's stock exchange in Frankfurt, Germany,
October 17, 2019. REUTERS/Ralph Orlowski
The problem could go beyond soaring borrowing costs. With the European market
for high-yield bond sales shut since Feb. 20, it is difficult to gauge who will
be able to borrow when the market eventually reopens and at what price deals
will get done.
"The high-yield and leveraged loan market is pretty well shut for the next bit.
I think it's very difficult to take any comfort in what's going to happen in the
market on a day to day basis," said a senior banker who arranges bond sales for
Names with significant amounts of debt due for repayment next year include
Germany's Thyssenkrupp <TKAG.DE>, Telecom Italia <TLIT.MI> and shipping giant
CMA CGM, according to 9fin, a data provider focused on high-yield markets.
Around 38 billion euros of debt by junk-rated corporates and financial issuers
in European currencies will mature by the end of 2021, according to Fitch
Philip Hertz, restructuring partner at law firm Clifford Chance, said industries
damaged by coronavirus and with debt falling due in the next six to 24 months
are the ones to watch.
The cost of insuring against high-yield European borrower defaults has risen to
eight-year highs in recent sessions.
"You have to ask yourself, are they going to be able to refinance where the
market is? Are they going to be able to put their balance sheets behind that?"
"They've got to start thinking about it now. If they can't refi, they've got to
think about restructuring."
(Reporting by Yoruk Bahceli; Editing by Sujata Rao, Chizu Nomiyama and Catherine
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