Junk Bond Investors Becoming More Picky, Says BlackRock's Rieder

(Bloomberg) -- Investors in the U.S. junk bond market are becoming more choosy and growing less tolerant for debt backing risky takeovers, according to Rick Rieder of BlackRock Inc.

While demand remains, the primary market for high-yield debt will be much more stratified, BlackRock's global chief investment officer for fixed income said in an interview following a press briefing in New York.

Read more: BlackRock's Rieder Sees 3.25% Yield, Rejecting Bond-Market Rally

Bond investors are paring back on risk amid rising volatility, higher spreads and equity-market selloffs. High-yield credit default swaps dropped earlier Wednesday to levels last seen in December 2016.

McDermott International Inc., an engineering-and-construction company, had to boost yields and reduce the size of a bond offering backing its takeover of Chicago Bridge & Iron Co. to $1.3 billion from $1.5 billion. The company is making up the difference by increasing a loan to $2.26 billion, and even on that financing terms had to be sweetened.

But for now, opting for more loans may become increasingly common for issuers that need to tap both markets. When Coty Inc. encountered headwinds on its recent refinancing, it had to rely more on U.S. institutional loan investors and banks. Floating-rate loans have beaten junk bonds for the last six straight months as interest rates climb.

"A rising rate environment is good for leveraged loans,' Jonathan Sharkey, a portfolio manager at Pioneer Floating Rate Fund, said in a note Wednesday. “That we're in such an environment is without debate.”

To contact the reporter on this story: Lisa Lee in New York at llee299@bloomberg.net.

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Faris Khan, Eric J. Weiner

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