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Seventeen borrowers are offering new debt in Europe on Wednesday, the most since Jan. 21 and adding to the more than $85 billion already raised globally this week. Companies around the world sold at least $752 billion of bonds last quarter, building up their defenses against collapsing earnings caused by the coronavirus pandemic.
“We expect issuance to continue as corporates look to bolster liquidity,” said Henrik Johnsson, co-head of capital markets at Deutsche Bank AG (DE:DBKGn). “The long term effect of all this debt is hard to quantify.”
Issuing debt in the current environment comes at a price, however.
The yield premium over low-risk treasury debt on euro-denominated investment-grade company bonds stands at 239 basis points, close to the highest since 2012. Average spreads on Asian high-grade dollar bonds jumped 179 basis points in the first quarter, the most ever recorded on a Bloomberg Barclays index going back to 1989.
Cruise ship operator Carnival (NYSE:CCL) Corp is offering to pay a coupon as high as 12.5% as it seeks to raise $6 billion in new debt in a deal launched on Tuesday. The sale was originally structured with a euro-denominated tranche, before the company decided to scrap the non-dollar portion.
With the virus causing devastation to the cruise ship industry, Carnival’s senior unsecured debt rating was cut two notches to Baa3 by Moody’s Investors Service overnight. S&P Global also recently lowered Carnival’s corporate ratings.
“Companies are worrying about a collapse in revenue so they need to borrow more to pay for operational expenses,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA. “The expectation of lower income and higher funding costs are pushing companies to issue more.”
Borrower binge
LVMH Moet Hennessy Louis Vuitton SE is offering euro notes due in five years at about 155 basis points above midswaps on Wednesday. Less than two months ago, it paid less than a fifth of that for 1.25 billion euros ($1.4 billion) of six-year notes.
Absolut Vodka maker Pernod Ricard (PA:PERP) SA is offering euro notes due in five and 10 years, with the shorter tranche offered at 180-185 basis points above midswaps. That’s about triple what it paid to sell euro eight-year notes in October.
Massive stimulus measures from central banks and governments around the world have helped slow a broader sell-off across risk assets in recent weeks and eased credit spread widening. But risks still abound, not least for money managers who have been bargain hunting in recent days.
One indicator continuing to show serious concerns for the global economy is oil, which posted the worst quarter on record. The rout has sparked a flurry of corporate and sovereign downgrades from Halliburton (NYSE:HAL) Co. to Mexico.
“We see rising default risks given slowing growth and the collapse in energy prices,” said Charles Macgregor, head of Asia at Lucror Analytics, an independent research firm based in Singapore. The broader record bond bonanza shows “wanton investor appetite” amid all the lingering risks, he said.
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©2020 Bloomberg L.P.
