Junk-Bond Investor Unease Resurfaces as Another Debt Deal Pulled

(Bloomberg) -- A mining company pulled a junk-bond deal Friday in the latest sign that investors are losing their appetite for riskier corporate debt.

Hecla Mining Co. pulled a bond sale following the biggest week of outflows from high-yield bond funds since early May and after at least three companies scrapped plans for junk deals last week. The gold and silver miner was expected to finalize selling $500 million of senior notes along with a tender offer for its 6.875 percent securities on Friday, but withdrew the deal as “terms and conditions were not sufficiently attractive,” Hecla said in a statement.

The pulled offering comes as investors have started to push for better compensation to buy debt from the riskiest companies as close to all-time high valuations and a renewed rout in oil prices have made them wary. It’s a recurring theme at this point in the almost breathless advance in credit markets: money managers hunting for yield pull back when the combination of frothy prices and market uncertainty provides reasons to be cautious.

“We have valuations at a level that has investors exercising caution,” said Bill Zox, chief investment officer for fixed income at Diamond Hill Investment Group Inc. “It’s been some time since we’ve had bouts of volatility and illiquidity. You just have a sense that it could be coming at any time and the fall in energy prices reminded investors where prices were.”

A call for comment from Hecla Mining in Coeur D’Alene, Idaho, wasn’t returned.

Risk Premium

High-yield bond investors are accustomed to watching out for weakness in oil after the selloff that started in 2014 rattled global markets. When crude drops below $35 a barrel, the debt-to-enterprise value ratios of junk-rated energy companies typically climb above 55 percent, according to Deutsche Bank AG strategists. That would increase the premium debt buyers demand to take on the added risk with ripple effects to the wider high-yield market, they said. Oil traded around $46 a barrel in New York on Friday and prices are down more than 5 percent this month.

Telecom provider Virgin Media, plastics maker Berry Global Group Inc. and Charter Communications Inc. all pulled their deals last week because of weak market conditions, according to people with knowledge of the matter. In the case of Charter, the cable company wanted lower yields than investors were willing to provide, said one of the people, who asked not to be named because the deal is private. Hecla may have withdrawn for similar reasons, said Sherif Hamid, a portfolio manager at AllianceBernstein.

Buyer Fatigue

“The big question is, is this opportunistic issuers trying to get better pricing, or is this an idiosyncratic thing where individual issuers are having trouble accessing the market,” he said. “Right now, you have the evidence that it’s not the latter.”

Signs of buyer fatigue also emerged this week in the leveraged-loan market, where investors were able to extract better terms from lower-rated borrowers coming to the market for the first time. Exela Technologies, American Addiction Centers Inc. and Canam Steel Corp. all sweetened their deals compared with where they first started marketing the loans.

Investors also pulled money from U.S. corporate high-yield bond funds, which saw outflows of $1.7 billion for the week ended June 28 compared with a withdrawal of $128 million the week prior, according to Lipper data released Thursday. Loan outflows also rose to $264 million from $150 million, the data show.

“The market is stepping back and people are taking a little bit of a breather,” Hamid said.

--With assistance from Sridhar Natarajan and Lisa Lee

To contact the reporters on this story: Molly Smith in New York at msmith604@bloomberg.net, Sally Bakewell in New York at sbakewell1@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Kenneth Pringle