Credit Buyers Put to the Test

Companies lining up for cash may find unpleasant pricing surprises in U.S. debt market.

Companies are about to find out just how much investors want—or don’t want—to buy their bonds.

Many corporations have largely been scared away from raising money in the U.S. debt market for the past two months, waiting for turmoil in the commodities, equity, and currency markets to subside.

But stocks and oil prices are still incredibly jumpy, China’s economy still appears to be slowing, and the interest-rate environment is still unsettled. The window is narrowing for companies that need to raise a lot of cash to pay for acquisitions they’ve announced as well as anything else they may want to buy, including their own shares.

The most likely result is that they will have to pay more than the market is currently implying, and investors who own trillions of dollars of corporate debt will be in for some losses.

“That’ll be the test,” said Peter Tchir, a macro strategist at Brean Capital LLC. “If companies come in really cheap, the next stage would be a much more widespread repricing of credit.”

Among the companies expected to approach bond buyers with their hands out are Halliburton Co., which may need US$8.6 billion to finance its takeover of Baker Hughes Inc., and Frontier Communications Corp., which plans to raise $6 billion to buy assets from Verizon Communications Inc., according to Barclays Plc.

To compound matters, market participants are also expecting an increase in sales of collateralized loan obligations (CLOs), or pools of corporate debt that have been sliced into pieces of varying risk and return. Wells Fargo & Co. analysts expect more than $31 billion of such deals to get sold during the rest of the year.

So a lot of players will be jumping into a cloudy U.S. credit market, which has been relatively inactive in July and August with the exception of a pocket of rather brutal selling in energy-related debt.

Company bonds, from the riskiest to the most creditworthy, have lost a mere 0.4 percent for the year amid all the turbulence—which looks pretty great compared with a plunge of more than 5 percent in U.S. stocks.

But when a trickle of issuance turns into a flood, it can propel those credit losses deeper and broader as investors absorb the glut.


--With assistance from Cordell Eddings and Michelle F. Davis in New York.

Copyright 2017 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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