Bond investors bet on battered companies surviving virus shock

Debt investors are betting that some of the companies most damaged by coronavirus will manage to avoid bankruptcy.

Bonds issued by low-rated companies in the US have rallied 7 per cent this month, one index of triple C bonds shows — the biggest jump in more than four years. In Europe, junk bond yields have fallen from over 8 per cent in March to almost 3 per cent as prices have risen, with November providing the bonds’ best performance since April. 

The jump in the Ice Data Services indices erases the losses sustained in the depths of this year’s market tumult to turn them positive for the year — a sharp change of heart for investors who once feared a global wave of defaults.

“It tells you investors are looking through the spike in Covid now,” said John Gregory, head of leveraged finance at Wells Fargo Securities. 

American Airlines, cinema operator AMC Entertainment and cruise company Viking are among those to have benefited most from the rally in bonds, as investors reassess the potential for companies wounded by coronavirus restrictions to survive the economic downturn. 

When coronavirus took hold globally in March and countries imposed lockdowns to try to contain it, the value of corporate debt plummeted, pushing the average yield across triple C rated companies close to 20 per cent in the US, from just above 11 per cent at the start of the year.

But yields pulled back again over the summer, and again in early November as the outcome of the US presidential election became clear. Momentum has gathered speed since November 9, when Pfizer and BioNTech announced they had developed a vaccine that was highly effective at preventing Covid-19. 

The scientific advances raise the possibility that an end to the economic stranglehold of coronavirus is in sight, and the profitability of companies that depend on the normal movement of people may return. Debt markets received another boost a week later, when Moderna announced that it too had developed an effective vaccine.

The more optimistic outlook has helped drag borrowing costs for risky companies below 10 per cent — their lowest in more than two years — prompting a wave of fresh fundraising, as cash-strapped businesses lock in funds in the bond markets from investors starved of high-yielding bets. This should help companies through what they hope will be the final leg of the coronavirus crisis. 

If the vaccine news had not come through, and the latest surge in coronavirus cases had led to greater social restrictions, the market “would be in a different spot”, said Mr Gregory.

S&P Global Ratings has also turned more optimistic, cutting its predicted corporate default rate for next year. It had expected the trailing 12-month default rate to rise to 12.5 per cent by next March in the US but now expects it to reach only 9 per cent by September. In Europe, too, it now anticipates a milder default cycle.

Some investors remain cautious. To withstand a collapse in earnings, companies have rushed to issue debt since the sell-off in March — a debt load that could prove problematic in a future downturn. Now, the extra $230bn outstanding in junk-rated bonds has pushed the total to more than $1.4tn, according to Ice Data Services. 

“We are still going to have to bridge through to mid-year next year,” said Henry Peabody, a portfolio manager at MFS Investment Management. “Still then [the vaccine] most likely won’t get to every American. And we seem to be entering a second wave, with associated pressure on economic growth . . . There is still a lot of wood to chop.”

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