Low-rated companies have used recent breakthroughs in the Covid-19 vaccine to borrow in a bubbling market, as investors contemplate the prospect of an effective coup improving the financial outlook for riskier borrowers.
Firms at the bottom of the rating scale and those whose profits have been decimated by the pandemic have used the dynamic mood to push debt deals down the line while delivering juicy returns to investors with an increased appetite for money. the risk.
The success of these deals reflects hopes of a vaccine-induced economic rebound next year. Historic central bank actions and low interest rates offered by blue chip borrowers have also encouraged investors to seek returns in riskier corners of the market.
Boparan, the UK’s largest chicken producer, headed by so-called ‘chicken king’ Ranjit Singh Boparan, issued high yield bonds this week. Prior to the financing, the chicken supplier to retailers including Aldi and Tesco had a triple C credit rating, in the lowest junk levels. He was weighed down by high borrowing levels, embarking on a turnaround plan involving the sale of assets, including Fox’s Biscuits, for £ 246million last month.
Just hours after Boparan’s £ 475million bond issue launched on Monday, US biotech firm Moderna has wowed the markets by announcing its coronavirus vaccine is nearly 95% effective.
It follows last week’s announcement by Pfizer and BioNTech of a high-potency vaccine, advancements that have boosted demand for unwanted bonds issued by UK exercise chain PureGym, whose sites have been coerced. to close again due to England’s second national lockdown. Its banks had held the debt since January, and the vaccine news gave PureGym bankers the boost they needed to avoid big losses.
“The bond market is definitely very hot now and has made the headlines of Pfizer and Moderna very positively, at least as far as credit risk is concerned,” said James Durance, European high yield portfolio manager at Fidelity International, adding that it has become easier for low-rated issuers to enter the market.
For Boparan, the breakthroughs of the dual vaccine have also been helpful. Over the summer, the company had sought to refinance its bonds that would mature in 2021, but plans were frozen after investors sought out excessively high borrowing costs, according to two people familiar with the matter.
Dominic Ashcroft, co-director of Emea leveraged finance at Goldman Sachs, said that before the vaccine announcements, deals for companies like Boparan “would have been more difficult to achieve or not reach the price points we have. have seen. . . . This week, they got a better level than two weeks ago.
Boparan’s £ 475million debt over five years, of which £ 50million was bought by Mr Boparan and his wife, gave investors an interest rate of around 7.6%, according to a pricing document viewed by the Financial Times.
Boparan declined to comment on this week’s deal or its potential refinancing over the summer.
U.S. companies at the bottom of the rating scale also benefited from the post-vaccine euphoria. The yield of a U.S. triple-C-rated bond index fell 0.72 percentage points on the day Pfizer made its announcement to 10%, the largest single-day decline since May, as investors rushed into debt.
The operator of the Carnival cruise line, a company whose profits have been squeezed by the pandemic, has steadily exploited the bond market this year. This week, she returned with her first unsecured trade, a riskier offer because the bonds are not secured by her ships or other collateral.
“The vaccine news has been a game-changer in the United States,” said Ben Burton, director of the American leveraged finance union at Barclays, adding that there had been a “dramatic” increase in appetite. for the risk.
In the loan market, Inspire Brands, which owns Buffalo Wild Wings and Arby’s restaurant chains, raised $ 2.6 billion this week to buy coffee chain Dunkin Brands. Bankers moved the deal’s closing date two days forward and lowered the company’s cost of borrowing to 3.25 percentage points from the benchmark rate, known as Libor, as a sign of request for agreement.
Falling borrowing costs and strong demand from investors to buy bonds or make loans have made debt markets an attractive alternative to fundraising by selling stocks, said Sarang Gadkari, co-director of global financial markets at the Bank of America.
The vaccine news has also sparked a wave of offers from riskier emerging market borrowers, with investors betting the sector will be among the biggest winners from a faster economic rebound.
This week, Uzbekistan raised the equivalent of $ 750 million in dollars and Uzbek som from its second bond issue alone, after a market debut last year.
“Before the second wave of Covid, markets were open to emerging borrowers, but not en masse», Said Sergey Goncharov, fund manager at Vontobel Asset Management.
Developments in vaccines have made investors “much more comfortable buying these riskier names,” he added. “The portfolio managers have accumulated so much liquidity and they are looking for places to put it to use.”