Carnival Bond Yield Proves Irresistible Despite Economic Despair

(Bloomberg) -- Amid all the economic despair in the age of coronavirus, there is still something about the promise of sky-high returns that the American investor finds irresistible.

Cruise line operator Carnival Corp. proved that Wednesday when investors clamored to buy a new $4 billion bond sale that pays interest of 11.5%, one of the highest coupons ever offered, particularly by an investment-grade rated company. Demand was so frenzied -- as high as around $17 billion -- that Carnival was able to cut the coupon and increase the original size of the offering by an extra $1 billion, according to people familiar with the situation.

Even with the economy spinning down, corporations around the globe have been able to tap the bond market to raise record amounts from investors in recent weeks. While executives are looking to stay liquid, investors’ confidence was buoyed by the trillions of dollars the Federal Reserve and other central banks are spending to buttress their economies.

The demand for Carnival’s bonds was especially notable because investors have largely shunned riskier firms. Its business has been ravaged by the virus and investors still can’t be sure when the company will sail again. Appropriately enough, the majority of orders for Carnival’s offering are from junk-bond accounts.

Yields that approach Carnival’s heights are usually seen only on the riskiest types of junk bonds, such as those issued from holding companies that are further removed from real assets or those that give borrowers the option to delay cash interest payments.

A flurry of other bond deals Wednesday continued a strong performance for much of March, with 11 new investment-grade dollar deals, and T-Mobile US Inc. is marketing a potential $10 billion offering for its acquisition of Sprint Corp. Europe had 17 new deals, its busiest day since January, including Tiffany buyer LVMH and Absolut Vodka maker Pernod Ricard SA.

Overall in March, U.S. investment-grade issuance topped $259 billion for a new monthly record, while European supply passed 135 billion euros ($148 billion), the most since 2016. Asia’s dollar market was quiet for most of the month, though Chinese internet search giant Baidu Inc. announced a deal to start April.

Still, returns were dismal. Even with the Fed’s help fueling a late stage rally, March was still the worst month for returns since the end of 2008, with U.S. high-yield down 11.5% and investment grade dropping 7.1%. The European index lost 6.9% in March, its biggest loss ever. Spreads on top-rated Asian dollar bonds ended the first quarter 146 basis points wider, the worst blowout since 2009.

“We expect issuance to continue as corporates look to bolster liquidity,” said Henrik Johnsson, co-head of capital markets at Deutsche Bank AG. “The long term effect of all this debt is hard to quantify.”

U.S.

Credit markets weakened with stocks on Wednesday as President Donald Trump told the U.S. to brace for one of its toughest stretches as a nation, with the death toll from the virus projected to potentially top 200,000. The high-grade borrowing bonanza showed no signs of abating with 11 companies launching $28.5 billion in new debt, meaning 36 issuers have already priced $78.8 billion this week

• T-Mobile has hired banks to market its secured bond offering to investors, which may come Thursday in dollars and/or euros with maturities ranging from five to 40 years
• Carnival wrapped up its $4 billion bond sale after boosting the dollar component, dropping the euro tranche and getting a two-notch downgrade from Moody’s Investors Service on Tuesday
• AB InBev is testing investor demand with a four-part offering of maturities due between 10 and 40 years, capitalizing on interest lately in the long end. It sold 4.5 billion euros of bonds Monday, and may need to cut its dividend to preserve ratings
  • For deal updates, click here for the New Issue Monitor
• Oil producer Whiting Petroleum filed for bankruptcy, the first big casualty of a global collapse in crude prices that’s leaving debt-laden shale explorers struggling to survive

Europe

Seventeen deals priced Wednesday in the primary market’s busiest day for more than two months, totaling 26.8 billion euros. It follows the best-ever quarter for debt sales, with more than 510 billion euros priced, mainly reflecting huge volumes at the start of the year, and lots of reverse Yankee issuance.

• Borrowers including LVMH Moet Hennessy Louis Vuitton SE and Absolut Vodka maker Pernod Ricard SA are leading a calendar set to price 26.57 billion euros
• Investors have thrown almost 100 billion euros worth of cash at today’s deals, according to data compiled by Bloomberg, led by demand for offerings from Portugal, Total Capital International SA, a euro green note offered by Spain’s Iberdrola Finanzas SA, LVMH and Pernod Ricard
• Spreads on euro IG company bonds remain elevated but have fallen about 8 basis points from multi-year highs reached on March 24, according to a Bloomberg Barclays index
• Spanish bankers and lawyers are bracing for a steep surge in insolvencies, amid the country’s rising death toll and strict lockdown measures. Prime Minister Pedro Sanchez has announced 117 billion euros of fiscal stimulus, but some business leaders say aspects of the government’s response risk making things worse
• European banks may get more time to meet loss-absorbing debt targets, the euro-area’s Single Resolution Board said. It’s ready to adapt transition periods and interim targets to help them deal with the coronavirus fallout

Asia

• The rebound in global bond sales in recent weeks has so far eluded Asia. After record issuance in January, sales of dollar securities by the region’s issuers, including financials and sovereigns, sputtered in the first quarter, totaling about $86 billion, up only about 3% on the year-earlier period
• One reason for that is that unprecedented stimulus from the Federal Reserve and European Central Bank has had more direct benefits in the U.S. and European markets
• Another factor is that Asian companies have been able to tap local-currency markets. Chinese companies sold a record amount of domestic bonds in March, for example, after Beijing flooded markets with cash
• But there have been signs in recent days that more borrowers may offer dollar debt. Chinese tech giant Baidu Inc. was marketing an offering Wednesday
• Spreads on top-rated Asian dollar bonds were 10-20 basis points wider Wednesday, according to traders. They ended the first quarter 146 basis points wider, the worst blow-out in a Bloomberg Barclays index going back to 2009

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