For corporate bonds, a week is an eternity

“Corporate markets head for indigestion”, was the headline last week for a bleak prognosis:

After the busiest start to any year for sovereign emerging-market debt, it’s corporate bond investors around the world who now seem to be heading for a massive case of indigestion, as ShortView noted last week.

And here’s the FT on Monday, warning that corporates will have to start offering investors price concessions and/or higher yields to get their bond issues away:

The rougher ride for last week’s deals suggests investor appetite is cooling, in stark contrast to the first two weeks of the year, when many companies borrowed at their lowest rates since before the financial crisis.

The poorer conditions have come amid broader market weakness, during which equity markets have tumbled.

What’s more even big companies such as BMW, Vodafone and other household names weakened in secondary trading while others, including the sterling-denominated bonds offered by Premier League football champions Manchester United priced with interest rates at the high end of the expected range.

One US company, Energy Transfer Equity, the owner of Energy Transfer Partners, a Texas-based energy pipeline operator, even pulled a $1.75bn sale, citing market conditions. And on Thursday, Morgan Stanley had to pay 10 basis points more than it had expected on rates on a $4bn bond deal, although that clearly had something to do with Barack Obama declaring war on Wall Street.

At the same time, investors are stepping up demands in the low-grade junk bond market by seeking higher interest payments or improved covenants that protect bondholders.

So what’s going on? Investors “just started the year a little ahead of themselves and now they’re looking at Greece and what’s going on with the US banks, and that feeling has gone,” one bond syndicate banker told the FT.

“Pricing deals flat to secondary market prices worked last year but, now things aren’t looking so fresh, investors need a little cushion.” But what a difference a week can make to the size of that cushion.

Related links:
A debt-equity conundrum for all deal makers – Tony Jackson, FT
Appetite for risk still vulnerable to a jolt – FT
Rate rise fears spark rush to issue bonds – FT