The global credit crunch and economic downturn have cooled companies’ interest in bringing new debt issues to market — especially among firms with below investment-grade credit ratings.
Investment-grade bond sales in the first half of the year fell 7 percent, to $497.4 billion, the lowest level since 2006, according to Thomson Reuters data collected through June 26. U.S. high-yield bond sales, however, plummeted nearly 68 percent, to $30.7 billion from $95 billion a year earlier, according to the wire service. This was the biggest drop and the lowest level of sales since the first six months of 2000.
Not a good omen. That 2000 decline in sales preceded a U.S. recession that lasted from March to November 2001.
Of course, this year’s volume drop is being compared to the party-like atmosphere in early 2007, when private equity deals were raging before the sub-prime mortgage crisis put borrowers in a totally different mood.
“We’re comparing this against the biggest rise last year in high-yield bonds, which was fueled by LBOs,” said Matthew Toole, an analyst at Thomson Reuters. “The credit crisis basically halted all sales of new bonds. It was prohibitively expensive for many issuers to come to market.”
It is no coincidence that the dearth of new debt deals is coming at the same time that investors are yanking money from the market. U.S. junk-bond mutual funds reported $651 million in net outflows in the week ended last Wednesday, the largest outflow of the year, Reuters noted, citing data from AMG Data Services. The outflow was about five times greater than the net redemptions of $134 million reported a week earlier.
Investors were probably well aware that in June, junk bonds registered the second worst performance of any major fixed-income category except municipal bonds, according to Reuters.
One ray of hope: last week global satellite company Intelsat priced $7.08 billion of junk bonds to help repay financing for its acquisition in February by BC Partners, Silver Lake and other equity investors, according to Reuters.