Global credit market stress deepens as pandemic puts focus on debt

The Dow Jones Industrial Average ended the longest bull-run in history for US shares.
The Dow Jones Industrial Average ended the longest bull-run in history for US shares.PHOTO: AFP

SINGAPORE (BLOOMBERG) - Stresses in global credit markets are intensifying after the World Health Organisation declared the coronavirus a pandemic and remarks by US President Donald Trump stopped short of offering a detailed US economic rescue package.

Borrowing costs in Asia's dollar bond market surged, as did the price of insuring such debt against default. That followed similar moves in the US and a deepening rout in global risk assets after Mr Trump suspended all travel from Europe for 30 days. Hong Kong shares headed into a bear market after the Dow Jones Industrial Average ended the longest bull-run in history for US shares.

Credit is increasingly a central concern as the coronavirus threatens corporate profits and leaves debt-laden firms suddenly facing much higher costs to roll over those borrowings. Companies from Boeing to Hilton Worldwide Holdings prepared to draw down billions of dollars in loans as they grapple with the impact of the pandemic. Bonds issuance stalled again in Asia after halting in the US.

"All risk assets are re-pricing to reflect growing potential of recession," said Mr Todd Schubert, head of fixed-income research at Bank of Singapore. Intense market volatility will likely continue in credit markets until investors are convinced of a globally coordinated fiscal policy led by the US to tackle the virus impact, with effective healthcare efforts, he said.

The response from global fiscal and monetary policy has been mixed. The promise of action from the European Central Bank helped restart the corporate bond market there on Wednesday.

"A cut in the cost of money can help but temporary hits to cash flow are the main concern and other measures will be required to keep businesses alive," said Mr Paul Brain, head of fixed income at Newton Investment Management in London. "The problem is not so much with the cost of credit as with the flow of credit."

ASIA

There were no fresh deals in the primary Asian dollar bond market on Thursday, though asset manager China Cinda priced the biggest offering from the region in two weeks on Wednesday.

The Markit iTraxx Australia index of credit default swaps was indicated about 10 basis points wider, trader prices show, on course for its highest level since July 2016.

Markit iTraxx Asia ex-Japan rose about 10 basis point to 115, according to traders. There have been bigger moves this week, but the gauge is on course for its highest level since January 2017.

Spreads on Asian investment-grade dollar bonds were indicated about 8-20 basis points wider, according to traders. The measure is on track for its highest level since June 2016, according to a Bloomberg Barclays index.

US

Companies affected by the virus are increasingly turning to banks for short-term financing to provide a safety net.

 
 
 
 

Investment-grade spreads widened 11 basis points to 183 basis points over Treasuries, the highest since 2016, while high-yield spreads also ended Wednesday at the widest since 2016, increasing 20 basis points.

Boeing is planning to draw down the full amount of a US$13.83 billion (S$19.3 billion) loan as early as Friday amid disruptions from the virus and its existing challenges with the 737 Max plane. Hotel chain Hilton will draw on a portion of a US$1.75 billion loan and casino operator Wynn Resorts will access a portion of its US$850 million revolving credit line in response to the market turmoil.

EUROPE

The BoE slashed its key interest rate to 0.25 per cent and announced measures to help keep credit flowing through the economy after warning the coronavirus will damage growth. The ECB began a new campaign to shield economies from the coronavirus, while German Chancellor Angela Merkel promised to do "whatever is necessary".

British finance minister Rishi Sunak pledged a £30 billion (S$53.8 billion) stimulus package as he seeks to prepare the British economy to fight the potentially devastating impact of coronavirus.

Long-dated pound bonds tumbled on expectations for more public spending, with a century bond issued by The Wellcome Trust in 2018 falling more than 3 pence to about 138 pence.