It’s been some time since companies could raise money in the debt markets and felt like they got the better end of the deal. Most read by Bloomberg For most of 2022, borrowing has been a tricky game of dodging rate hikes and negative inflation data, showering bond investors with the extra yield to ensure they buy your debt.
In 2023, many of these potential land mines will remain. Markets in most parts of the world are still heading for rate hikes, albeit small ones. The risk of a recession later this year is still very real. And inflation, while declining, remains a concern.
However, in some corners of the credit markets, companies are beginning to see money being thrown around in a way that feels very similar to the easy money era.
A case in point is Oracle Corp’s bond offering. last week to refinance a bridge loan used to purchase electronic medical records company Cerner Corp. has been recorded. Oracle originally wanted to raise $4 billion. Then bond investors placed orders for a whopping $40 billion in debt. Not only has the company increased the size of its offering, but it has also increased a negative concession, which market lingo calls a negative concession, Bloomberg’s Brian Smith wrote this week.
When companies issue debt, they typically scatter a few extra basis points on top of what you would normally pay. In 2022, those concessions averaged 13 basis points per Smith. Oracle walked away with $5.2 billion at an average concession of -11 basis points, meaning investors effectively gave up some of the return they could otherwise have earned by buying Oracle debt in the secondary market.
The software giant is not alone. Corporations issued more than $18 billion in US dollar-denominated bonds at an average concession of -1 basis point last week. This was due to orders five times the bid size, meaning investors were essentially forgoing their new issue premiums to get some of the business.
All of this suggests that FOMO is now gripping markets as fixed-income money managers, buoyed by signs that interest rates have peaked, rush to snap up yields that are beginning to recede.
CLO whale
Corporate bonds aren’t the only market where big money is making a comeback. In collateralized loan obligations, securities backed by risky buyout loans, and other highly leveraged corporate bonds, Japan’s Norinchukin Bank plans to resume purchases, Bloomberg’s Carmen Arroyo and Lisa Lee wrote last week. Nochu, as the bank is known, was once one of the largest buyers of CLOs in the world. But he paused last year when UK pension funds sold their holdings of securities, sending the market into turmoil.
A Nochu representative previously declined to comment to Bloomberg when asked about his CLO plans.
CLOs were a hot market during the easy money era because, thanks to the magic of financial engineering, they can convert junk-rated loans into high-quality securities that pay out more than the typical AAA bond.
Nochu, which has bounced back and forth in the market for the past few years, is planning its return just as CLO issuance is recovering from last year’s turmoil. Growing demand has helped U.S. CLO issuance hit $10.5 billion so far this year, up from the $7.5 billion it was trading at this point in 2022, according to data compiled by Bloomberg.
Elsewhere:
- High-yield dollar bonds from Chinese issuers continued their winning streak at record levels, while the country’s struggling real estate sector rallied on supportive government policies and an improving economic outlook. However, new home sales slumped further in January, underscoring the challenge the country faces in bailing out the property sector.
- Dalian Wanda Group Co., one of the few Chinese companies to have recently sold US dollar bills, speaks to the state-controlled Industrial & Commercial Bank of China Ltd. on an offshore loan to repay a $350 million bond maturing next month. Bloomberg News reports.
- Yen corporate bond spreads hit a new high, deviating further from global credit and reflecting pressure on the Bank of Japan to normalize its ultra-loose monetary policy.
- Blackstone agreed to acquire American International Group’s $3.6 billion CLO assets, a transaction that would make the investment giant the world’s largest manager of CLOs.
- Billionaire Patrick Drahi’s Altice France gave some breathing room to its debt burden by reaching a deal with creditors to extend the terms of its approximately $6.13 billion loans.
- Carl Icahn’s Auto Plus chain filed for bankruptcy in Houston, blaming slowing demand for auto parts and supply chain problems.
