Corporate Bond Sales Freeze, Prices Drop After Russia's Attack

(Bloomberg) -- Companies postponed bond sales in the U.S. and Europe Thursday and credit risk gauges surged after Russia invaded Ukraine.

The military action heightened volatility in global bond markets already roiled by tightening monetary policy, partly from concern of the effects on inflation and growth.

“The escalated uncertainty in Ukraine, and the spike in commodity prices, moderates the outlook for global growth and therefore increases the risk for corporate credit,” said Matt Toms, chief investment officer of fixed-income at Voya Investment Management.

Borrowers who could sell debt easily on any day for much of the last two years are now having to look for windows of relative calm. Price swings in secondary markets are widening. 

New sales of U.S. investment-grade and junk bonds will likely shut down for the remainder of the week, according to people familiar with the matter. BellRing Brands, which began marketing a junk-bond deal Tuesday, pulled the sale. 

U.S. leveraged loan prices fell 1/2 to a full point in muted secondary trading Thursday, according to people familiar with the matter. Meanwhile, a gauge of U.S. credit risk spiked, with the cost to protect a basket of investment-grade dollar bonds against default rising to the highest level since July 2020. 

Risk premiums on investment-grade U.S. bonds had already been rising steadily through Wednesday. And the high-grade index may understate the severity of the sell-off in corporate bonds because some less liquid index components haven’t yet traded, JPMorgan Chase & Co strategist Nathaniel Rosenbaum wrote Thursday. 

In Europe, the cost of insuring junk bonds rose by as much as 38 basis points to its highest since June 2020. Thursday is the 10th trading session in a row without a European junk bond sale, the longest run since the pandemic struck in March 2020. 

“Bids are in very small sizes. Prices are all over the place,” said Ksenia Mishankina, a London-based research analyst at Loomis Sayles. “Expect more Western sanctions to come out ASAP that are likely to hit major banks to start with. Everything is in the cards at the moment.”

Market participants say the risk-off sentiment means some high-yield debt sales could be on pause for the near future. 

“There are few high-yield deals that have to price in the near term, so in the short run we expect that the new issue calendar will be very quiet until there is greater clarity with regards to the Ukraine,” said Ken Monaghan, co-head of high-yield at Amundi. 

Just a few leveraged loan deals launched this week and new sales are likely to remain on hold, while those currently in market may be slow to complete as investors assess the impact of the Russia-Ukraine conflict. Opportunistic deals that were being considered, such as repricings and those backing dividends, are likely to be postponed, people familiar with the matter said. 

“Some of the tougher credits might have to get pulled,” said Bill Ammons, a founding partner and portfolio manager at AlbaCore Capital, in reference to new loan sales. “Especially if it’s a bit more opportunistic, you’ll maybe wait for a better day.”

The biggest buyers of loans, collateralized loan obligations, are also anticipated to see new deals slow after the current batch in the pipeline wrap up, the people said.

U.S. Impacts

Investors say that while the overall growth picture is concerning, few U.S. companies will be severely affected by the invasion for now. 

“The entire global economy is going to be impacted by Russia and Ukraine, but there’s not really going to be a lot of direct impact in the U.S., in terms of issuers whose results are going to be directly impacted by what’s going on there,” said Jeremy Burton, a portfolio manager at Pinebridge Investments. 

Some see the sell-off in credit as a buying opportunity, especially in investment-grade bonds.

“Keep your eyes on the long-term and don’t get sucked into the abyss of negativity,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. “Short-term blips in volatility and weakness in financial markets tend to be long-term buying opportunities.”

Globally, automakers are one sector with significant direct exposure to Russia. Hyundai Motor Co., Volkswagen AG, and Renault SA had the most 2021 unit sales in Russia, based on data from AEB and Bloomberg, and their bonds could be affected by the invasion, Bloomberg Intelligence analyst Joel Levington wrote Thursday. 

Elsewhere in credit markets:

Americas 

U.S. investment-grade borrowers will steer clear of debt sales on Thursday in the aftermath of Russia’s invasion of Ukraine.

• Oil surged above $105 a barrel for the first time since 2014 after Russia’s attack triggered fears of a disruption to energy exports at a time of already tight supplies
• Benchmark municipal bonds are rallying the most since late 2020 on Thursday amid a rush into haven assets
• Moody’s placed Meritor’s ratings under review for upgrade following the announced acquisition of the firm by Cummins
• Toshiba received an early takeover offer from Blackstone, and may consider the bid depending on the results of next month’s shareholder meeting, Nikkei BP reported

EMEA 

Risk in European credit markets jumped, leading Germany’s Land NRW to postpone its planned $400 million sale.

• The cost of insuring European investment-grade debt reached the highest since May 2020
• Oil and gas firm Wintershall Dea, which derived a fifth of its revenue from Russia in 2020, and Raiffeisen Bank International, with sizable exposure to the country, are leading losses in the euro high-grade corporate bond market
• The crisis over Ukraine probably won’t keep the European Central Bank from agreeing on a faster wind-down of asset purchases at its next policy meeting, though the prospects for an interest-rate hike are less clear, Governing Council member Gabriel Makhlouf said
• Banks arranging the financing for the buyout of Wm Morrison Supermarkets Plc are considering sweetening the long-delayed deal

Asia 

Primary issuance in the Asian dollar bond market on Thursday slowed from the previous day, with Russia-Ukraine developments likely to impact the Asian dollar credit market even more via risk aversion.

• Drops in Chinese high-yield dollar bonds expanded to 2-5 cents on the dollar Thursday afternoon, with debt from Logan and Shimao plunging
• In India, HPCL will tap the onshore bond market on Friday as the refiner plans to raise as much as INR15b through notes maturing in about five years
• The worst for Chinese developers’ financing access may be over by 2Q, says Fitch, though internal cash will continue to be builders’ main source of repaying capital-market debt until investor confidence recovers

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