The dramatic move of raising the interest rate (0.4%) by the Bank of Israel, for the second month in a row, together with high inflation, were the main factors influencing the issuance activity in the corporate bond market in May.
Raisings amounted to NIS 5.8 billion, a decrease of 27% compared to the previous month, and a decrease of 42% compared to March this year. The credit rating company S&P Maalot points out that the decrease in the volume of fundraising was accompanied by an increase in the level of risk margins at all rating levels.
In doing so, Maalot confirms Globes’ findings from two weeks ago, regarding a trend of opening risk spreads (spreads) between corporate bond yields and government bonds.
Impact on the ability to raise future debt
The yield to maturity in bonds reflects the level of risk that the market sees, and affects the ability of companies to continue to raise new debt in the future. The company.
Thus, inflation leads to an increase in interest rates, hits the stock markets and at the same time increases the price of corporate debt. The increase in risk that investors see leads to the opening of yield spreads, a situation that may lead to difficulty for some when repaying the debt, which may lead to liquidity difficulties.
Two weeks ago, during the sharp falls in the markets, it seemed that real estate companies mainly recorded sharp falls in bond prices, which raised the yield in a way that increased risk. Companies like Israel Canada, Hanan Moore, Mega Or and others, saw the long bond series Theirs climb to yield to maturity at a relatively high single-digit level. Since then, the trend has calmed down a bit, and for example, Israel’s bonds (G) are currently trading at a yield of 6%, having already touched 6.7%, a level that led the company to open a self-purchase program of its bonds.
Maalot estimates that the corporate debt raising market is expected to continue to cool, and in this context it notes the correct preparation of companies in the economy, which in recent years have raised debt for long periods, with relatively high maturities. In degrees, “IPO activity in 2022 may be more moderate than in previous years.”
“Fear of erosion in profitability in various sectors”
In the analysis of the debt market in May, Maalot notes that in recent weeks there has been volatility and a strengthening trend in the rising trend in risk margins: , Adding that “the concern that these challenging conditions may persist increases the assessment that there may be an erosion in the profitability of companies from different sectors, and has also led to re-pricing of risks, which has been reflected in a significant increase in risk margins at all rating levels.”
The findings from the Maalot analysis show that the risk margins of companies in the BBB rating group in Israel reflect a level of about 3.5%, compared with about 2.3% about a month ago and a year ago. The level of risk margins of the AA and A groups reaches about 1.5% and about 2.5%, compared to about 1% and about 1.5%, respectively, their level about a year ago.
However, towards the end of May, from the beginning of the current week, there seems to be a slight calm in the debt market, in parallel with the recovery in the stock market. The Tel Bond 60 index, which includes the 60 largest bonds (in terms of value) in the economy, has already reached an implied yield to maturity (gross) of 1.44% last week. It has recovered and is down to a yield of 1.08% today, with the decline reflecting the decrease in risk levels that the market fears.
Another change that emerges from Maalot analysis is a decrease in the weight of CPI-linked debt. It is still the popular channel for corporate debt raising, accounting for over half, but the division is starting to change. Of the 58% of total 2021 raising in index-linked bonds, they constitute 52% from the beginning of the current year.
“Inflation affects the basis of the linkage and there is no doubt that a great deal of uncertainty has been created and various estimates regarding the level of inflation expected in the coming months,” Maalot says.