Credit Markets May Not Be So Forgiving Post-Pandemic

(Bloomberg) -- Investors looking to make a buck on corporate distress can only hope the post-pandemic world is more accommodating.

Rock-bottom interest rates, a reopening economy and yield-starved investors mean all but the most-troubled businesses have managed to borrow their way out of trouble. Credit markets may not be so friendly if the projections underlying that borrowing prove too rosy once post-Covid results come out, according to Phil Brendel of Bloomberg Intelligence.

“The market will shift from pricing on projections and start looking more at actuals,” Brendel said in an interview. “We're at credit bubble levels of distressed debt. So credit markets are vulnerable to a significant correction.”

The pile of distressed debt outstanding, which totaled almost $1 trillion at the height of the pandemic, has sunk to about $60 billion, data compiled by Bloomberg show. By one measure, the proportion of high-yield bonds outstanding that is trading at distressed levels is the lowest since the run-up to the 2008 financial crisis, Brendel said.

Bankruptcy court, too, is eerily slow. The first half of 2021 saw the fewest large bankruptcies in the U.S. since 2018, according to data compiled by Bloomberg. Just 75 firms with at least $50 million of liabilities sought court protection from creditors as of June 30, compared to 129 in the same period last year and 79 in 2019.

“The confluence of liquidity, reemerging economic activity and continued patience on the part of the creditor community has resulted in a lull in bankruptcy filings,” said Aaron Javian, a partner at law firm Reed Smith who advises on restructurings. “The willingness of new lenders to lend into distressed situations has enabled companies to kick the can down the road a ways,” he added.

Precisely when the music will stop is anyone's guess. Fitch Ratings last month dropped its leveraged loan and high-yield default rate forecasts for the year to 1.5% and 1.0%, respectively -- a 10-year low.

The benchmark U.S. high-yield CDX index price fell 0.28 points to 110.13 as of 1:08 p.m. Tuesday in New York, the biggest percentage decline on an intraday basis since May 17, according to data compiled by Bloomberg. The index tracks a basket of credit default swaps and falls as risk rises.

U.S.

Nomura Holdings and Mizuho Financial are leading the charge in what dealers project will be a $15 billion to $20 billion week, with Yankee issuers playing a big role. A few more deals are expected to come to market later Tuesday morning in New York.

Carnival Corp. is tendering as much as $2 billion of debt. The offer will expire on Aug. 2. The following securities are targeted by the offer: CCL 11.5% 04/01/23
Mortgage investors had a bad first half in 2021. As of the end of June, the Bloomberg Barclays U.S. MBS index has produced an excess return versus Treasuries of -0.46%, the worst performance seen over the first six months of any year since 2015, which also saw a -0.46% tally
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Europe

Five borrowers are in the market on Tuesday for a minimum of 6.5 billion-euro ($7.7 billion), according to data compiled by Bloomberg.

France is marketing 5 billion euros of bonds, while French bank BNP Paribas SA is also selling a Swiss franc-denominated green bond
Pharmaceutical company Gruenenthal GmbH is marketing 300 million-euro add-ons to its notes due 2026 and 2028
Swiss lender UBS Group AG said it will call a $1.1 billion 7.125% CoCo bond at the first opportunity on Aug. 10

Asia

Chinese high-yield dollar bonds fell as much as 2 cents on the dollar Tuesday, according to credit traders, with property developers again leading the declines.

The slump in secondary trading came amid even more fresh debt plans. Chinese mobile phone giant Xiaomi Corp. kicked off a potential sale of its maiden green bond as part of a broader package of dollar notes
Elsewhere in the region, Nomura Holdings Inc., Japan's biggest brokerage, marked a return to the dollar bond market after taking a rare step in March of scrapping a deal that had already priced amid the fallout from Archegos Capital Management
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