Carnival Borrowing Without Ships Suggests Mnuchin May Be Right
(Bloomberg) -- Hours after U.S. Treasury Secretary Steven Mnuchin called for emergency lending programs to be allowed to expire, corporate bond investors continued to flood Carnival Corp.’s bankers with more than $11 billion in orders for debt that comes with no collateral protection.
For some, it was a sign that credit markets aren’t so fragile after all. After roughly $2 trillion of borrowing helped U.S. companies bolster their balance sheets with cash to weather the pandemic, investors have grown increasingly confident -- perhaps even complacent -- that the widespread corporate failures predicted by many earlier this year have largely been avoided. Granted, the Fed helped fuel nearly all of that debt issuance, and the investor demand supporting it.
And even if the immediate lifeline of $580 billion in backstop money is returned by the Federal Reserve to the Treasury, traders are betting that markets will fare just fine, anticipating that the government will step in again if new signs of stress emerge.
“The reality is that if things start getting crazy and spreads start widening, the Treasury Secretary can re-authorize the Fed to open the facility again,” said Patrick Leary, chief market strategist at Incapital. “It’s more of a confidence thing for the market, given it may not be the best time with virus surges and shutdowns, but it’s not like these facilities are being used to support market functioning any more.”
Read more: Mnuchin’s Efforts Are Seen as Having Muted Impact on Credit
Carnival, a bellwether for companies hit hardest by the pandemic, raised almost $9 billion by issuing bonds and loans backed by its idled ships earlier this year, some with coupons above 10%. This week, it borrowed at a rate of 7.625% without pledging any assets. The offering came on the heels of an equity raise, one of many the cruise operator has deployed to finance its way through the pandemic.
Investors placed orders in excess of $11 billion on this week’s $2 billion bond sale, denominated in both dollars and euros, according to people with knowledge of the deal, who asked not to be identified because the details are private. Representatives for JPMorgan Chase & Co, which led the bond sale, and Carnival, declined to comment.
“It is a strong indication that liquidity remains abundant,” Ben Emons, managing director of global macro strategy at Medley Global Advisors, said before the sale was finalized. “There is not a sign yet of capital markets shutting down.”
That doesn’t mean credit investors were pleased with Mnuchin’s demands. A gauge of U.S. credit risk known as the Markit CDX investment-grade index increased by the most since Oct. 28 earlier Friday. But that index, which rises as investor fears grow, is trading at about a third of the level it reached at the peak of market turmoil in March.
‘Back to Normal’
The U.S. corporate bond buying program had previously been extended from an earlier Sept. 30 end date. Market participants had expected another extension given the economic impact of a recent surge in Covid-19 cases and they’re still counting on the Fed’s support.
The central bank wants to keep its facilities up and running given what it calls the economy’s “still-strained and vulnerable” state. Some investors are already looking ahead to the possibility of a new Treasury secretary in the Biden administration to reinstate such programs.
But in the meantime, the market is ready to stand on its own two feet, said Matt Brill, head of U.S. investment-grade credit at Invesco Ltd. Companies have taken advantage of record low rates to right-size their balance sheets, and the Fed won’t be far out of reach, he said.
“We need to wean ourselves off of the drug here, and this is an important step to have that happen,” Brill said. “At some point we need to get back to normal, meaning the Fed isn’t supporting the bond market on a day-to-day basis.”
American Bath priced a $335 million junk bond sale to help fund its buyout by Centerbridge Partners.
- Dan Fabian, president at credit-focused asset management firm Alcentra, says the private companies it is financing in its direct lending funds in Europe and North America seem to be performing relatively well even as Covid-19 infections ramp up again
- No companies are looking to tap the U.S. investment-grade primary market on Friday, according to an informal survey of debt underwriters, as sales slow from $40 billion this week to potentially nothing through the U.S. Thanksgiving holiday
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
- Corporate-default risk fell in the region on Friday, initially for both high-yield and investment-grade credit, although the investment-grade benchmark widened marginally at the end of Europe’s day
- “These problems are minor from a credit perspective,” Juan Valencia, a credit strategist at Societe Generale said in emailed comments. “The most important thing now is economic expectations and the amount of money in the system still to be invested. Euro deals are having strong demand and the ECB continues to buy corporate credit”
- European primary issuance continued apace on Friday, with eight new deals in the market helping push weekly volume past 30 billion euros ($36 billion)
- The Co-Op Bank is giving junk-bond investors an opportunity to buy senior bank debt, offering potentially 200 million pounds ($265.5 million) of bonds that will be rated seven steps below investment grade by Moody’s Investors Service
There were signs in Asia that many market participants continued to bet the pandemic will force policy makers to take more steps ahead.
- Spreads on investment-grade dollar bonds were little changed, traders said
- “There will be a new president in January 2021 and there will be a stimulus package,” said said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “We believe investors should look past these short-term events, and if prices come off, view them as buying opportunities for what we believe will be a solid year for emerging-market credit globally in 2021.”
- Elsewhere, Tokyo-based Kirin Holdings Co. priced green notes whose proceeds will be used to improve energy efficiency at its factories among other things. Only a handful of beverage companies worldwide have issued sustainable bonds
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