Whiplash In The Junk Bond Pit-----Dealers Have Gone AWOL

By Katie Linsell at Bloomberg News

Junk bond investors have a bad case of the jitters. Every bit of bad news is whipsawing prices, with bonds tumbling as much as 50 percent in a single day.

“We’ve seen some flash crashes in the market,” saidHenry Craik-White, a senior investment analyst at ECM Asset Management in London, which oversees $8 billion. “If you get caught on the wrong side of a name, you can get severely punished in this market.”

Investors are rattled because they’re concerned that a lack of liquidity in the bond market will make it impossible for them to sell holdings in response to negative headlines. Trading dropped about 70 percent since 2008, with a corporate bond that changed hands almost five times a day a decade ago now only being sold once a day on average, according to Royal Bank of Scotland Group Plc.

Alarms started ringing in September with the collapse of British retailer Phones 4u Ltd. after Vodafone Group Plc and EE Ltd. refused to renew contracts. The retailer shut its business and sought creditor protection on Sept. 15, sending the company’s payment-in-kind bonds down to 1.9 pence on the pound, according to data compiled by Bloomberg.

EDreams, Abengoa

A month later, notes of Spanish online travel service EDreams Odigeo SA fell 57 percent in one afternoon when Iberia Airlines and British Airways Plc said they were withdrawing tickets from the company’s websites. The 10.375 percent bonds almost fully recovered the following trading day when the airlines reinstated the tickets.

Abengoa SA’s debt plunged as much as 32 percent last week amid investor confusion about how the Spanish renewable energy company accounted for $632 million of green bonds. The Seville-based company’s 8.875 percent notes dropped to 74 cents on the euro from 107 cents in two days and rebounded to 95 cents after Abengoa held a conference call to reassure bondholders.

Bonds of Europe’s largest insurance broker Towergate Finance Plc dropped 32 pence on the pound in two days this week to 29.5 pence after the company reported a slump in earnings and said it may not comply with the terms of a fully-drawn 85 million-pound ($133 million) revolving credit facility.

“People were shell-shocked after Phones 4u and since then, fear has started to grip the heart of investors,” said Roman Gaiser, who oversees 4 billion euros of bonds as head of high yield at Pictet Asset Management SA in Geneva. “People are partly risk-averse because we’re approaching year-end and they want to mark down their books. It’s sell now, ask questions later.”

‘Brutal’ Pricing

Nerves have seeped into the market after three years of rising demand for risky debt pushed average yields to a record low 3.6 percent in May, Bank of America Merrill Lynch index data show. Now investors are demanding more compensation, with the average yield premium over government debt climbing 37 basis points this year to 409, the biggest spread widening for the period since 2011.

Buyers are also wary because Europe’s economy is showing little sign of growth while consumer confidence deteriorates. The corporate default rate rose 0.1 percentage point to 2.3 percent in October from September, according to Moody’s Investors Service. Even so, that’s down from 3.9 percent a year earlier.

“Combine high cash prices and low yields with a very uncertain growth outlook for European businesses and some patchy secondary market liquidity, and the moment any problem emerges the repricing can be brutal,” said James Tomlins, a London-based high-yield fund manager at M&G Investments, which oversees 257 billion pounds of assets.

Marked Down

Sudden drops in bond prices are becoming more dramatic because new capital rules are making banks who act as dealers less willing to hold on to bonds while they look for buyers, according to Neil Murray, the global head of credit at Aberdeen Asset Management Plc in London, which has about $519 billion of assets under management.

“Historically trading desks acted as a buffer, nowadays they are in no mood for taking bonds on their balance-sheet given the constraints they are under,” said Murray. “When bad news comes out, they mark debt down dramatically.”

After investors placed $25.8 billion into high-yield credit funds last year in Europe, flows have been negative so far this year with $1.8 billion of withdrawals, Bank of America strategists led by Barnaby Martin wrote Nov. 14. That compares with $58.3 billion placed in investment-grade funds this year.

“Some ’tourist’ investors came into the game to clip coupons and now they realize there are landmines dotted all over the European high-yield market, and they’re treading on them” said ECM’s Craik-White. “A change of investor base is needed in some credits.”

For Related News and Information: Abengoa Bonds Rebound as Firm Seeks to Reassure Investors (2) EDreams Plunges After Iberia, British Airways Halt Ticketing (2) Bond Liquidity Falls 70% in Europe as Sales Soar: Credit Markets

http://www.bloomberg.com/news/2014-11-21/abengoa-to-towergate-bond-crashes-bare-junk-jitters-euro-credit.html

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