Powell Stokes Credit Concerns, Forcing Borrowers to Stand Down

(Bloomberg) -- Credit risk continued to rise in the U.S. and Europe after the Federal Reserve said a full recovery from the Covid-19 pandemic will take years.

The cost to protect investment-grade corporate debt against default in both regions rose for a fourth straight day Thursday, a notable shift in what’s otherwise been a weeks-long rally. Europe’s syndicated bond market saw just four transactions, compared to 15 the previous day, while 10 borrowers in the U.S. stood down after considering bond sales.

Investors are losing their appetite for risk after Fed Chair Jerome Powell suggested Wednesday that the pandemic could inflict long-lasting damage on the economy, reinforced Thursday by a slow decline in U.S. jobless claims. And a second wave of the virus is emerging in certain parts of the U.S., raising alarms as new infections push the overall count past 2 million Americans.

That’s sending spreads wider in the secondary market and forcing issuers to pause. Borrowers in both regions have been busier than ever in recent months as central bank support has fueled rampant supply and demand, which had pushed borrowing costs down to pre-pandemic levels.

“The market seems to be taking a breather after some massive tightening over the past weeks as there has been hardly anything positive on the virus front over the last week, while economic data continues to point towards a grim future ahead of us,” said Shanawaz Bhimji, a strategist at ABN Amro NV.

U.S.

In the high-yield market, Wynn Macau announced a new $750 million sale that’s expected to price Friday.

• Investors poured $14.6 billion into funds that buy U.S. investment-grade debt, high-yield bonds and leveraged loans in the week that ended June 10, just before a sell-off caused credit markets to tumble
• A massive wave of corporate distress is pitting beleaguered companies against their lenders in brawls that are shaping up to be nastier than ever before

Europe

Primary sales have slowed sharply after exceeding 1 trillion euros for the year earlier this week. There’s also a public holiday in parts of Europe today, further slowing issuance.

• The iTraxx Europe index of investment-grade default swaps is widening for a fourth straight day, its longest streak since March
• British Gas owner Centrica will cut 5,000 jobs before the end of the year to meet cost-reduction targets as coronavirus-related uncertainty weighs

Asia

A Thai energy giant and a couple of non-investment grade issuers offered dollar bonds, indicating continued resilience in Asia’s credit market despite a tick back up in borrowing costs.

• Offerings from three issuers extended what has been a busy week in the primary dollar bond market. At least 14 issuers have sold notes totaling more than $5 billion from Monday to Wednesday, according to data compiled by Bloomberg
• Yield premiums on the region’s investment-grade notes widened for a second straight day and the cost to insure against defaults was set for a third day of gains
• PT Garuda Indonesia added to a list of flag carriers that got some relief from creditors after it won approval from investors to extend the maturity of a $500 million sukuk

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