Investors around the world are running away from almost anything smacking of risk in capital markets.
Sales in the US junk-bond market have stalled, Chinese lenders are bracing for a new bout of defaults and initial public offerings — from First Data Corp to Albertsons Cos — have been marred by investors uneasy about opening up their wallets. Blaming adverse conditions, Petroleo Brasileiro SA, the world’s biggest junk-rated borrower, canceled plans for its first local-currency bond sale in 15 years.
The cautiousness among investors stems from worries over global growth, spurred by a slowdown in China’s economy. That comes as the largest central banks mull easing policies that have failed to provide a strong boost to their economies.
Several upcoming offerings might test investor appetite for risk, including the debt Dell Inc is expected to issue for its US$67 billion purchase of EMC Corp.
“Everyone has become conservative at the same time,” MatlinPatterson chief risk officer Ashwin Bulchandani said.
“Investors are wondering if the uncertainty and growth concerns are temporary or is something more sinister going on in the background. You’ve got a particularly messy cocktail of things coming together at one point,” Bulchandani said.
The corporate junk-bond market in the US is in the midst of an unprecedented slowdown, seven years after a boom in such debt spurred by the US Federal Reserve’s easy-money policies. The market’s on pace for its slowest October since at least 2005, according to data compiled by Bloomberg.
Only one bond deal has priced in three weeks and those unable to wait have tried and failed. Canadian organic food company SunOpta Inc and machine-parts maker NN Inc scrapped bond deals and might be forced to lean on their banks to provide backup financing.
A Goldman Sachs Group Inc-led group of banks is struggling in its bid to raise US$2.8 billion of debt for Concordia Healthcare Corp after having provided committed financing for the Canadian pharmaceutical company’s acquisition bid.
“Most of the people we are talking to, unless they are forced to come, are waiting on the sidelines for a better day,” Wells Fargo & Co head of leveraged syndicate John Gregory said in an interview. “We are prepping them to hit the market when there are windows of opportunity. I don’t think volatility is going to decrease through the end of the year.”
Baltimore-based T Rowe Price has reduced its exposure to high-yield bonds in its target-date retirement funds, said Mark Vaselkiv, manager of the US$9.5 billion T Rowe Price High Yield Fund.
“There is a lot of pessimism about the world as a whole,” Vaselkiv added.
Dell is planning to raise up to US$49.5 billion to fund the largest tech deal ever, according to a filing. Even if just a quarter of that is raised in the US high-yield market, it could be a record junk-bond offering.
“That is a big number and we’ll see what the appetite is,” Angeles Investment Advisors chief investment officer Michael Rosen said.
Ghana, which sold US$1 billion in debt this month at 10.75 percent, is an example of a borrower that has been forced to offer a higher yield, Rosen said.
“Poor-quality borrowers, which they apparently are, have to pay up,” Rosen said.
“I think you see that across the board,” he added.
Slowing economic growth is adding to strains in China’s 42.2 trillion yuan (US$6.8 trillion) bond market, which has had five defaults this year, according to China International Capital Corp.(中金公司).
China’s National Development and Reform Commission (NDRC) is also to ask holders of Sinosteel Co’s bonds not to sell them back on an option date next week, people familiar with the matter said.
The steel trader’s parent Sinosteel Corp (中國中鋼) sent a letter to noteholders pleading with them to not exercise the option, two of the people said. If they do, the firm is likely to struggle to repay, China Merchants Securities Co (招商證券) said.
The NDRC did not immediately reply to a fax seeking comment.
Two calls to the press office at Sinosteel Corp went unanswered.
In the equity markets in the last week, Digicel Group Ltd canceled its initial public offering plans, grocery chain Albertsons postponed its offering and First Data was pushed to price its shares below the marketed range.
Anxiety about corporate profits drove those decisions. Wal-Mart Stores Inc predicted earnings are to decline next year and quarterly results from JPMorgan Chase & Co disappointed.
Investors are not in any hurry to rush back in after the most recent bout of volatility, Gregory said.
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