Junk Bond Market Freeze To End With First HY Bond Sale In 2 Months

One month ago we reported that the junk bond market had effectively frozen as a result of surging spreads, or as the FT put it "ground to a halt", because, for the first time since November 2008, not a single high-yield bond had priced in the market in the past 30 days. Today, the Wall Street Journal picked up on this, reporting that "December was the first month since 2008 without a junk-bond sale". In fact, the market had gone for a whopping 40 days without a sale, the longest stretch in data going back to 1995. The reason for the bond issuance drought was a familiar one: "volatility in financial markets, uncertainty about the economy and the recent drop in oil prices are discouraging riskier companies from issuing debt and investors from buying it".

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Of course, it hasn't been a complete freeze for the junk market, which was hit with $101 billion in net investor outflows in 2018. As we noted previously, whereas there has been no bond issuance in the past 6 weeks, loan issuance has been lively, if subdued, totaling $25 billion in November and December according to LCD. But that was still a significant slowdown from previous months.

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As the WSJ notes, the drop-off in debt issuance, whether junk or not, is important because it "complicates companies’ efforts to invest in plants, equipment or other business infrastructure, a key component of economic growth" (this is different from IG company borrowing needs, where the funds are usually used to fund M&A and/or stock buybacks). Additionally, firms borrowing in the high-yield bond market are also among the most sensitive to changes in financial conditions. Significant increases in their borrowing costs, particularly at a time when economic growth is slowing down, will sharply boost their chances of bankruptcy.

Once they begin, dry spells in debt markets can persist, as few potential borrowers are interested in being the first to test investors’ appetite for new bonds. Among the businesses currently waiting to issue debt is the automotive-battery business that Johnson Controls International PLC is selling to a group led by Brookfield Business Partners . That deal is expected to be funded with roughly $10 billion of debt. Investors and bankers say it could take smaller bond and loan sales to pave the way for larger deals, and the successful completion of one large transaction could open the door for others.

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