Three Deals That Show the Junk Bond Bonanza May Have Hit a Wall

By Laura Benitez and Lucca de Paoli
(Bloomberg) — A bathroom-fixtures maker, a North Sea oil
producer, and a storied supercar company are sending signals
that the record year for junk bonds may be reaching its limits.
Investors have piled into high-yielding company bonds,
looking past specific threats in a bid to offset shrinking
returns. But the hefty yields paid by Ideal Standard
International SA, Ithaca Energy Ltd. and McLaren suggest the
market may be reaching an inflection point as issuers have to
sweeten deals to overcome jitters about the economic fallout of
the delta variant of Covid-19.
“I do see much more downside than upside when I look at the
virus,” said Jochen Felsenheimer, managing director at XAIA
Investment in Munich. He warns that Covid-19 and inflation will
make conditions tricky for junk offerings in the last three
months of the year andadmits he’s pricing in a “very optimistic”
view on how the pandemic plays out.
Ideal Standard, whose products range from taps to toilets,
was betting that a healthier balance sheet after its 2014
restructuring and higher-than-average yields would lure
investors to its 325 million euro ($275 million) debt sale on
Friday.
But the size of the offering was ultimately reduced and —
for the first time this year on the European junk market — the
notes were priced higher than initially proposed. The bond
dropped in the secondary market.
“The pricing still doesn’t compensate for the risks that
the company poses,” said Malick Donval, credit analyst at Spread
Research, who issued a sell recommendation to its clients on the
new bonds, citing the company’s 1 billion euro loan partly due
in 2024.
In a similar vein, Ithaca Energy Ltd also had to price its
$625 million five-year deal at the top end of its range last
week. The 9% coupon was one of the highest rates a European
high-yield borrower has paid this year.
And while supercar-maker McLaren’s bond sale last week was
a success — with demand outstripping the amount of debt on
offer by seven times — the yield the company paid was still one
and a half percentage points higher than the average for
companies with a CCC rating.
Read More: McLaren Bonds Draw Billions in Investor Demand
in Race for Yield
The trio of deals show that, for now, riskier companies can
still raise debt. That’s helped sales surpass 87.7 billion euros
so far this year, with the lion’s share contributing to the
busiest first half on record for European junk debt, according
to data compiled by Bloomberg.
And the lure of richer returns in markets awash with
stimulus is still there. High-yield debt returned 3.22% year to
date compared with 0.52% for investment grade, Bloomberg
Barclays indexes show.
But if the spread of new Covid variants further dims
investor hopes for a global recovery, it may not be a smooth
ride for riskier corporate issuers later in the year.
“I don’t expect spreads to tighten from here on now,”
Donval from Spread Research said. “Post-summer we could see
higher-risk companies face greater challenges as investors
demand compensation for the risks being taken.”