Bonds: Things are getting tight for weak debtors
The rising yields are also having an impact on corporate bonds. Financing remains affordable for companies with good credit ratings - weak debtors face significantly higher interest charges.
French corporate bonds worth 215 billion euros currently have lower yields than French government bonds, Bloomberg reports.
Despite increased yields on government bonds, financing remains affordable for companies with good credit ratings; the risk premiums for corresponding corporate bonds in the euro area are just under one percentage point.
Air Liquide even placed bonds with yields around 0.25 percentage points below those of French government bonds, which shows that investors view corporations and states differently.
However, companies with poor credit ratings, especially in the non-investment grade segment, sometimes face higher interest payments.
Frankfurt. Upside down interest rate world. Actually, the rule in the bond market is that, with a few exceptions, companies can only take on debt at worse conditions than their home countries. But the distrust of the escalating national debt is now so great that investors are now giving better conditions to more and more companies with good credit ratings.
This applies especially to France. There, corporate bonds worth 215 billion euros are now generating lower returns than French government bonds. According to data from the Bloomberg information service, that is 18 times more than at the beginning of the year.
This unusual reversal shows that the sharp rise in Treasury yields is also shaking up the world of corporate finance. “This is one of the biggest issues at the moment,” says Denis Ertungealp, who looks after German industrial groups that issue bonds at the US bank Bank of America (BofA).
The rising yields on government bonds also make refinancing more expensive for companies. For a long time, companies were spared the extreme swings in national debt. But that has changed in the last few weeks.
The risk premiums, i.e. the yield spreads compared to government bonds, have recently increased significantly. For credit strategists like Juan Valencia from the major French bank Société Générale, this raises the question of whether this will herald the end of previously affordable financing for companies.
Companies with good creditworthiness in particular, to which the rating agencies give credit ratings in the investment grade range, can still live with the increased costs. The average yield for euro-denominated bonds has risen from 3.3 to 4.2 percent since the beginning of the year and in the USA from 4.8 to 6.0 percent.
Unlike government bonds, however, corporate bonds do not break decades-old yield records, but merely reach the level of two years ago. Despite the recent increases to just under one percentage point in the euro area and 0.8 percentage points in dollars, the risk premiums are only at the level of last year.
“We are still a bit away from companies with investment grade ratings having problems,” says Ertungealp. There are also no problems with investor demand.
New bonds from companies are somewhat less in demand than at the beginning of the year. Ultimately, demand is still on average three times as high as supply.
Companies are heading towards record emissions
The good demand is all the more remarkable since companies have already issued new bonds worth almost 390 billion euros and a trillion dollars this year. This means that emissions in the euro area are heading towards a record and in the USA they are heading towards their highest level since 2020.
However, the increased returns do not immediately have a direct impact on companies' interest costs. This is because companies still have many bonds outstanding that they issued during low interest rates before 2022. It will therefore take time for the higher interest rate levels to become more noticeable on companies' balance sheets.
In addition, many companies have significantly improved their balance sheets in recent years in terms of profitability and debt. This has not changed as a result of the recent market turbulence, emphasizes Valencia from Société Générale. He therefore assumes that risk premiums will fall again.
Air Liquide finances itself significantly cheaper than France
The latest example of investors lending to companies more readily than to increasingly indebted states is the French industrial gases company Air Liquide. He was able to place his bonds at yields that were around a quarter of a percentage point below those of French government bonds. No company has ever been able to refinance itself so much more cheaply than the French state. “This shows that investors do not put an international company in the same mold as the French state,” says Ertungealp.
“But the situation is not equally good for all companies,” the bond expert adds: “The further you go down the rating spectrum, the greater the risks.” According to the rating agency S&P Global, persistently higher returns will particularly test weaker borrowers.
The returns of companies with non-investment grade credit ratings for weaker borrowers in the euro area and the USA rose by an average of one and a half percentage points each to 6.5 percent and 8.2 percent respectively. Risk premiums also rose more sharply.
Since companies with poorer credit ratings usually issue bonds with shorter terms, the increased yields are reflected more quickly in interest payments. According to calculations by Lotfi Karoui, credit strategist at the world's largest active bond investor Pimco from the USA, the most acutely at risk are US companies with extremely poor creditworthiness and ratings in the "CCC" range.
If these companies had to refinance their bonds maturing in the next two years at current yields, the interest burden would double from current levels, Karoui has calculated. The result would be serious imbalances and failures.
