Europe Lockdowns Put $50 Billion of Bonds on Cusp of Junk Grade

(Bloomberg) -- A new wave of junk downgrades looms over Europe as the region shudders under one of the worst outbreaks of the pandemic.

Some 84 bonds worth 46 billion euros ($52 billion) are on the cusp of losing their investment-grade ratings -- marking a reappearance for fallen angels that had all but vanished this year, according to Bloomberg Intelligence analysts. 

“With European lockdowns back on, fallen angels are a worry,” Mahesh Bhimalingam and Bhumika Gupta wrote in research published Thursday. There was just one fallen-angel downgrade in Europe in the past six months, they wrote.

The downgrades are another sign of cracks emerging in the European credit market that’s been buttressed by central bank bond buying for years and even more so during the pandemic. But now that support is set to diminish as soon as March -- and the prospect is pushing up borrowing costs and volatility.

The risk premium in euro-denominated corporate bonds, as measured by Bloomberg indexes, just rose above 1% for the first time in more than a year. This comes as spread volatility is rising to multi-month highs from depressed levels.

Read more: Spreads Turn Into Important Factor Again for European Credit

“The fourth Corona wave is not leaving the credit markets unscathed,” Erste Group analyst Elena Statelov wrote in a note Thursday. “In the coming days and weeks, we expect a volatile development of risk premiums in the corporate bond segment,” with weaker credits under the most pressure, she said.

Europe is the pandemic’s epicenter again as inflections spike to a record in Germany and governments consider stay-at-home mandates to stem the tide. Austria has gone for a full lockdown and threatened to make vaccinations compulsory, while Italy and Germany are toughening measures on the unvaccinated.

EMEA

Four issuers are marketing deals today in four tranches worth 3.8 billion euros.

• Seven weeks after coming under short-seller attacks, Adler faces fresh scrutiny from investors as it reports 3Q results and hosts a call with investors next week

Asia

Asia’s primary dollar bond market took a pause on Thursday as the Fed’s latest minutes indicated that elevated inflation may lead to a faster pace of tapering. Concerns about a cash crunch in China’s troubled real-estate sector remained.

• Markets were also quiet due to the Thanksgiving holiday in the U.S.
• Kaisa Group Holdings Ltd. offered to exchange at least $380 million in bonds for new notes maturing in 2023 in a bid to avert default, while the city of Chengdu rolled out measures to support the property sector
• Dollar bond issuance from Asia totals around $2.25 billion since Monday, significantly lower than last week, with deals from Chengdu Communications Investment Group, Shandong Energy and China Everbright Bank

Americas

U.S. markets are closed on Thanksgiving holiday.

• Federal Reserve officials at their last meeting were open to removing policy support at a faster pace to keep inflation in check, even before data showed price pressures accelerating
  • Since the meeting, data on inflation have worsened, with Commerce Department figures for October published earlier Wednesday showing prices rose 5% over the past year, marking the highest inflation rate since 1990

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