The number of companies tapping the bond market has collapsed as a result of rising interest rates, threatening to halt a global refinancing wave that helped companies boost earnings and strengthen balance sheets

June 13, 2013 6:26 pm

Bond sales dry up as interest rates rise

By Vivianne Rodrigues and Stephen Foley in New York

The number of companies tapping the bond market has collapsed as a result of rising interest rates, threatening to halt a global refinancing wave that helped companies boost earnings and strengthen balance sheets.

Bond investors have retrenched in the face of increasing market volatility since Fed chairman Ben Bernanke hinted on May 22 at a possible “tapering” of US quantitative easing. This has left companies unable to raise financing on previously beneficial terms.Some of the world’s largest and best-known companies, such as Apple, Vodafone and Petrobras, have borrowed billions of dollars at record low rates, and even highly leveraged companies have locked in cheap financing through the junk bond market.

“The bond market is a bit of a disaster right now,” said Michael Collins, senior investment officer for Prudential Fixed Income. “All that borrowing for the sake of borrowing just because yields were at record lows is probably behind us.”

US sales of investment grade corporate debt, which began to falter last month as US Treasury yields rose, have this week come to almost a complete halt.

By the end of Thurssday, only $4.1bn worth of investment-grade bonds were sold, down from a weekly average this year of $23.2bn, according to Dealogic data.

The drop in sales of high-grade debt follows a similar decline in US junk bond offers, which started two weeks ago. Only six junk borrowers came to markets this week, in sales worth $1.6bn. Until the middle of May, the weekly average issuance was $8.8bn.

Traders are saying the few companies venturing into the US debt market – mostly super-safe utilities trying raise funds before borrowing costs get even more expensive – are having to accept concessions to drive deals through.

“Investors still have money to put to work but it seems they would rather hold cash than pay up for poor-performing new issues,” said Ed Marrinan, head of macro credit strategy at RBS Securities.

“It looks like we may begin to see a new trend in issuance with fewer deals, wider levels and lower oversubscription rates.”

Issuance in the rest of the world has also slowed down markedly. On a global basis across investment grade and junk, the number of corporate bond issuers is only 55 so far this week, versus a weekly average of 202 this year.

Traders reacted to Mr Bernanke’s comments last month by sending 10-year Treasury yields to 14 month highs, reducing the attraction of corporate debt.

Bonds issued ahead of the surge in benchmark government rates are showing paper losses for investors.

Investment-grade bonds have suffered the steepest declines, with average yields climbing 50 basis points since the end of April. Investors who flocked to Apple’s record-breaking $17bn offering six weeks ago are nursing losses of up to 9 per cent on the longest-dated bonds.

For banks, a drop in debt sales may put a dent on what has been a valuable source of revenue in recent quarters.