Current state of debt markets

I'm hearing that IG debt is still open but that HY debt markets are closed. This is an area I don't always have a direct ear to the ground but need to keep up on. Can anyone confirm please? Does this mean transactions done with only bank debt will still go through but any buyouts planned with HY will stop? How should I be thinking about this? Thanks.

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Comments (7)

  • Analyst 2 in IB - Gen
Mar 18, 2020 - 7:09pm

Can only speak for Europe but as of the start of this week there hasn't been any HY deal coming to market in 3 weeks. Lev Loan still has opportunistic deals but we see spreads widening by 50-75 bps on generally most of these. HY fund outflows continues, 2bn outflow last week I think.

Stark contrast from Jan. Buyouts could still continue using bridge financing - but either caps or fees on those would have to be generous for banks to come calling.

Mar 18, 2020 - 8:13pm

HY markets are closed. Last two deals priced on March 4th. YTD new issue volume total is still at USD90.612bn equivalent (USD70.498bn and non-US$ USD20.114bn equivalent).

IG markets have been weird. Off to a record start in 2020 then the COVID-19 volatility closed the market. There are a few days here and there a few deals do price, usually when all equity futures are up. For instance, yesterday 10 IG deals priced with futures up. However, nothing priced today with all equities lower. Needless to say, there is a large backlog of IG deals and when this volatility subsides there will be an opening of the flood gates.

Credit Flow Research provides incredible data on both IG and HY markets, as well as nicely written articles in the AM and PM on the debt markets. Currently a free service but I am sure they will soon start to charge for the service. Hope this helps!

Mar 18, 2020 - 10:03pm

I can provide a little bit of color. HY is certainly closed at the moment, but there are a number of deals on the sideline as well. Many of our clients are choosing to place nearly completed deals on ice, but not scrap altogether. Sellers are obviously understanding and complying as they don't want to take valuation hits. I alone have 2-3 deals that were 1-2 weeks within signing before everything hit the fan. Now it's just a matter of how long it will take to conquer the virus. Although he sounded a bit crazy today on CNBC, Ackman may be onto something. 1 month closure could eradicate this thing and return the world to normal. Anyone else have thoughts on how long it will be? In my opinion, ideally by end of April...

Mar 19, 2020 - 2:55pm

Just my opinion - but definitely feel with c.1 month ish of lockdown things should settle. My concern is that (i) Italy hasn't pushed the curve down, and (ii) there is a lot more in terms of earnings being disrupted that I feel the market has priced (some would say they have been excessively price in, but both viewpoints are hard to gauge).

Also probably second wave in Asia? good luck to us all then

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Mar 19, 2020 - 3:27pm

Great points. Regarding your first point, I think Italy is going to reach an inflection soon. Unfortunately, most of the world is working with imperfect data due to test kit shortages. Ideally, the curve should flatten dramatically within the next week (given they are roughly 1-1.5 weeks into quarantine), which could give the rest of the world hope. On your second point, I think the markets are currently a mess. Equities is incredibly volatile and HY debt is closed. Ideally speaking, if this passes, the debt markets should not take this into account, but rather evaluate new loans coming to market based on the future potential of companies. After all, this is the exogenous event that most Econ textbooks mention. I would assume that bankers and investors alike would adjust LTM financials for disruption due to this mess.

On your last point, if there is a second wave in Asia, especially China, hopefully it is very isolated and close to a vaccine rollout date. In the near term, it appears that some combination of hydroxychloroquine and azithromycin is the world's best shot.

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