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Borrowing Costs of European Junk Bonds Making It More Difficult for Firms to Raise Money

Borrowing prices for junk-rated European firms have tripled in less than a month, and with the market for new debt issuance closed, there could be much more pain in store for companies needing to raise money to redeem the debt.

Borrowing Costs of European Junk Bonds Increase Making It More Difficult for Firms to Raise Money

The yield on the iBoxx euro liquid high-yield index, which tracks 250 corporate bonds with sub-investment grade rankings, hiked to a seven-year high Monday of over 7%, based on Refinitiv data.

On February 20, when the spread of coronavirus was just beginning to shake investors, the average yield on the index was 2.69%, less than 100 basis points off record lows set back in 2017.

Now, just halfway through March, the yield is on course for its greatest monthly surge since October 2008, when markets had been dealing with the results of investment bank Lehman Brothers’ slump.

Many individual issues are faring even worse — yields on 2027 subordinated bonds from Legoland owner Merlin Entertainments have spiked almost 10%, up over 6 share points in three weeks, based on Tradeweb.

However, even these levels may not tell the whole story. With liquidity drying up in this more volatile property, funds trying to dump any sizeable holdings are having to sell at lower prices than quoted on trading platforms, market players stated.

There is more to come, with Deutsche Bank reviewing goals for the European high-yield market Monday to recession levels at a spread of over 1,000 foundation factors.

That can exacerbate pressure for asset managers in the industry— JPMorgan stated European excessive-yield funds it tracks have lost near 6% of their assets in the last two weeks, with outflows hitting 4 billion euros.

The problem could transcend hovering borrowing costs. With the European market for high-yield bond sales shut since February 20, it’s tough to guess who will be able to borrow when the market eventually reopens and at what price transactions will be executed.

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