Finance

Bonds collapse in explosive growth world at 5% rates: Credit Weekly


(Bloomberg) — The first trade occurred at 9:54 a.m. at 38 cents. These are bonds from a little-known company called Enviva Inc., a wood pellet manufacturer based in Bethesda, Maryland. Just the night before, on November 8, the bond closed at 64 cents. The losses quickly deepened as the session wore on, with the bond falling to 31 cents.

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A few days ago, a similar situation happened to Dish Network Corp. – whose bonds went into free fall, wiping out about $10 million in value in a matter of hours – and then to cable service provider WideOpenWest and skin health company Beauty Health Co. – The nursing company, after reporting quarterly earnings.

Debt investors are in no mood to tolerate bad news. Not when they can now get risk-free rates of over 5% on U.S. Treasuries (as opposed to the rates that have been close to 0% for years). The news on all these fronts has been pretty bad – Enviva even hinted it might have to close – so a market reaction was always inevitable. But what’s surprising is the speed and severity of the decline. To some, the moves feel more like a hair-trigger reaction. The stock market has traditionally been more volatile than the bond market.

“This is unusual compared to past years. Capital is more constrained and people are looking more carefully at cash flow and business models,” said Christian Hoffmann, a portfolio manager at Sandberg Investment Management.

Analysts at Barclays Plc agreed. Nearly a quarter of all bond moves of at least 1 cent against the dollar in the three months to March were in response to gains, up from 18% in 2022, they said in a note .

Market observers say another market dynamic may also be at play. Bond prices could fall sharply further because banks, which act as middlemen between sellers and buyers, can no longer take on so much risk on their balance sheets. Banks are offering deeper discounts as investors rush to sell.

Nichole Hammond, senior portfolio manager at Angel Oak Capital Advisors, said plummeting prices are attractive to distressed buyers, which could ultimately increase demand for riskier bonds and loans.

Enviva’s 6.5% bonds due in 2026 rose more than 20 cents at one point after plunging in secondary trading, according to Trace data. Spirit Airlines Inc.’s bond prices are slowly recovering after the bad news, and iHeartMedia Inc.’s bond prices are slowly recovering. The debt turnaround comes after the company’s disappointing fourth-quarter forecast.

John McClain, portfolio manager at Brandywine Global Investment Management, said more action is expected as corporate borrowers continue to report earnings.

“There will definitely be more fireworks,” he said. “We’ll see who wins, who loses, who spends the money. As consumers start to get squeezed, we’ll start to see more negative headlines.” “

Week in review

  • Media executive Byron Allen is considering a bid for broadcaster EW Scripps Co.’s stations and is seeking money from private debt markets to pay for potential deals.

  • HPS Investment Partners is set to provide EasyPark AB with a direct loan of approximately 750 million euros ($802 million) to support its acquisition of a rival company.

  • Banks plan to finance Cinven’s acquisition of Synlab AG with a debt package of more than 1 billion euros ($1.1 billion) by the end of the year.

  • Investment banks and private lenders are formulating plans to provide up to 3 billion euros ($3.3 billion) of debt to support a potential acquisition of Techem GmbH.

  • Dalian Wanda is facing renewed pressure as pre-IPO backers of the company’s commercial arm rejected an initial offer to delay repayment of more than $4 billion in investment.

  • Subprime auto bonds are big business for Wall Street, even though about a third of the underlying borrowers are in default.

  • Investment-grade bonds have seen inflows for three consecutive weeks, Bank of America said, citing data from EPFR Global.

  • High demand for the latest tranche of additional Tier 1 bonds is an encouraging sign for banks that will add $30 billion in debt next year.

  • Manulife Investment Management is acquiring a majority stake in billionaire Michael Hintze’s CQS, expanding the Canadian investment firm’s specialized fixed-income investment strategies.

  • Kennedy Lewis Investment Management, an alternative credit manager with about $14 billion in assets under management, is exploring strategic options including an outright sale.

  • Investors are eyeing piles of corporate debt to prepare for potential future pain after a federal law curbing unexpected medical bills triggered some of the year’s biggest bankruptcies.

  • Lenders to bankrupt companies are increasingly demanding the use of a controversial contract clause to back up their investments in exchange for giving the companies a chance to survive.

on the move

  • BNP Paribas has made a number of senior appointments across its Americas banking business, including Mark Lynagh and Adnan Zuberi as co-heads of global capital markets and Erin Brown ) serves as head of leveraged finance.

  • Nomura Asset Management has appointed Kapish Patel as co-portfolio manager of its corporate hybrid bond fund.

  • First Eagle Alternative Credit hires Larry Holzenthaler as managing director, portfolio manager and senior alternatives strategist.

  • Eldridge Industries, the investment firm led by billionaire Todd Boehly, has hired former Investcorp partner David Lee.

—With assistance from Claire Boston and Tariana Odayal.

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