Worries over European debt are beginning to crimp corporate debt sales; drag down returns.
It may be time to hold off on issuing that debt. Bloomberg reports that corporate bond sales worldwide – both high-yield and investment-grade – fell off a cliff in the second half of November after surging in the first half of the month. On top of this, returns on debt already issued are down for the month as well.
According to data compiled by Bloomberg, debt issuance has slumped 29 percent since Nov. 15, after surging 34 percent in the prior two weeks. At the same time, according to the Bank of America Merrill Lynch bond index, returns on bonds will take a 1.1 percent loss in November.
Up until now, corporate debt has had a great year, as companies took advantage of low borrowing rates and a seller’s market to raise funds for stock buybacks or, as in the case of Microsoft, raise dividends. But now buyers are beginning to balk as they look at what’s happening in Europe and fear the lack of confidence could spread. For treasurers this means finding alternatives for raising cash (if actually needed) or proposing a delay until European debt woes blow over. This could take a while, however, as there are a few other troubled countries, like Spain and Portugal, who could very likely be next in line to get bailouts from an already cash-strapped EU.
There is also talk that such a drop off in corporate debt issuance often foretells a selloff in the stock market – in which case waiting to do any share buybacks should wait, too.
Earlier signs of a slowdown
Despite the recent slowing of the five-month rally corporate debt issuance, there have been signs of a drop off coming. Last month PIMCO’s head of corporate bond portfolio told CNBC that his firm had a “just say no” approach to companies that are underlevered or had weak fundamentals.
Another sign was that deal covenants were reportedly becoming increasingly less restrictive, which some felt reflected a bubble mentality. For instance, an October offering by eBay had none of the provisions that usually allow investors “to be compensated for a change of control, such as a takeover,” according to the Wall Street Journal (see related story here).