The capital markets have been on ice since the collapse of Silicon Valley Bank two weeks ago.
No companies with investment-grade credit ratings sold new bonds over the seven business days from March 9 through March 17, the first week in March without a new high-grade bond sale since 2013, according to PitchBook LCD. The market for new junk-bond sales has largely stalled this month, and no companies have gone public on the New York Stock Exchange in more than two weeks.
March is typically busy for new corporate debt financings: Companies look to secure financing before the blackout period between the end of the first quarter and the kickoff of earnings season, when they typically refrain from bond sales. Lately, a lack of investor confidence and wild swings in the Treasurys market have kept companies on the sidelines.
Those with the highest ratings have sold $59.9 billion in new bonds this month, compared with March’s five-year average of $179 billion. The riskier corporations that borrow by issuing higher-yielding junk bonds and leveraged loans are finding it even harder to sell new debt. Companies have raised some $5 billion of junk bonds this month versus the five-year average of $24 billion.
Although the market for investment-grade offerings thawed in recent days with nearly a dozen deals from utilities, insurers and other companies, the lull in activity among the largest, safest corporate borrowers suggests there could be further pain ahead. Companies from mom-and-pop operations to multinationals will find it harder to access credit in the wake of sudden stress in the global banking system, analysts say.
“Ultimately, financial conditions will tighten further, either via additional central-bank tightening as they try to tame inflation or via a deterioration in the current banking crisis,” said Seema Shah, chief global strategist at Principal Asset Management.
The March 10 collapse of Silicon Valley Bank upended capital markets, reducing the risk appetite of the asset managers and pension funds that lend to companies by buying their bonds. Extreme stress in the Treasury market further complicated borrowing plans. Liquidity—the capacity to trade quickly at quoted prices—fell sharply, and government bond yields saw their biggest single-day moves in years.
Corporate bond borrowing rates are determined by adding a risk premium to the Treasury yield, or risk-free rate. If Treasury yields are moving much more than normal, a company that launches a bond sale in the morning expecting to pay one rate could find the market has changed rapidly by the time the deal is priced in the afternoon. That uncertainty over interest costs, a major expense for some companies, can keep them out of the bond market when volatility is high.
The Federal Reserve is watching lending conditions closely and announced another quarter-percentage-point rate increase Wednesday to fight inflation. Fed Chair Jerome Powell said that if recent bank stress makes it harder to borrow, the economy will slow and the Fed may not have to tighten policy as much.
“It’s possible that [bank stress] will contribute to significant tightening in credit conditions over time, and in principle that means monetary policy will have less work to do,” Mr. Powell said in a news conference.
Already, the Fed’s rapid campaign of rate increases has made it much more expensive to borrow, and inflicted particular pain on companies that borrow by issuing leveraged loans, a type of syndicated loan with a floating interest rate used by companies with poor credit ratings.
John McClain, a fixed-income portfolio manager at Brandywine Global Investment Management, said the biggest risks lie in the leveraged-loan market. Roughly $300 billion in loans are coming due over the next three years, according to PitchBook LCD, and refinancing will be difficult.
“It’s going to be a triple whammy for the leveraged-loan space. Companies’ interest costs go up, the economy is ticking down so their earnings are going down, and the main buyer in that space, CLOs, may or may not be around,” said Mr. McClain, referring to the collateralized loan obligations that are a major source of demand for risky company loans.
Small businesses that rely on bank loans for capital expenditures are also facing a new reality, analysts say. Easy lending standards since the Fed cut rates to near-zero at the start of the pandemic in 2020 helped fuel a boom in small-business activity that has largely continued, despite now higher interest rates.
As the regional banks that have come under pressure in recent weeks adjust lending standards, some of their small-business clients may find they are offered loans under stricter terms, in smaller amounts, or not at all. Many regional banks have also faced significant deposit flights in recent days, meaning they have less capital available to lend in the first place.
Even though small-business owners are now paying more for short-term loans—about 8% interest on average, compared with 4% in 2020, according to National Federation of Independent Business survey data—they have generally accessed credit with ease.
In the February NFIB small-business economic trends survey, just 3% of small-business owners said their borrowing needs weren’t satisfied. That figure topped 11% in 2010 during the global financial crisis.
“From the small firms’ point of view, credit has been pretty friendly,” said Bill Dunkelberg, NFIB chief economist. “But they don’t like the increase in rates. And we haven’t had time yet for the regional banks and little community banks to adjust their policies.”
Analysts are rushing to quantify the potential impact on the U.S. economy.
In the base case for Goldman Sachs Group Inc., tighter lending standards will subtract one-quarter to one-half of a percentage point from U.S. GDP growth in 2023, equivalent to the impact of Fed rate increases of the same size, according to Jan Hatzius, the bank’s chief economist.
“The risks are tilted toward a larger effect and the uncertainty will likely linger for a while,” Mr. Hatzius wrote in a research note.