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Vaccine hopes clear path for riskier groups to tap capital markets

Low-rated companies have used recent breakthroughs in the Covid-19 vaccine to borrow in a bubbling market, as investors contemplate the prospect of an effective coup improving the financial outlook for riskier borrowers.

Firms at the bottom of the rating scale and those whose profits have been decimated by the pandemic have used the dynamic mood to push debt deals down the line while delivering juicy returns to investors with an increased appetite for money. the risk.

The success of these deals reflects the hopes that are based on a vaccine-induced economic rebound next year. Historical central bank actions and the low interest rates offered by blue chip borrowers also encouraged investors to seek returns in the riskier corners of the market.

Boparan, the UK’s largest chicken producer, run by the so called “King of the Chicken” Ranjit Singh Boparan, issued high yield bonds this week. Prior to the financing, the chicken supplier to retailers including Aldi and Tesco had a triple C credit rating, at lowest levels of waste. He was weighed down by high borrowing levels, embarking on a turnaround plan involving the sale of assets, including Fox’s Biscuits, for £ 246million last month.

Just hours after the launch of Boparan’s £ 475million bond issue on Monday, US biotech firm Moderna wowed the markets by announcing that its coronavirus vaccine was almost 95% efficient.

It followed last week’s announcement by Pfizer and BioNTech a high-potency vaccine, advances that have spurred demand for junk bonds issued by UK exercise chain PureGym, whose sites have been forced to shut down again due to England’s second national lockdown. Its banks had held the debt since January and the vaccine news gave PureGym bankers the boost they needed to avoid. significant losses.

“The bond market is definitely very hot now and has made the headlines of Pfizer and Moderna very positively, at least as far as credit risk is concerned,” said James Durance, European high yield portfolio manager at Fidelity International, adding that it has become easier for low-rated issuers to enter the market.

PureGym bankers have been granted a reprieve thanks to the breakthrough of the Pfizer-BioNTech vaccine. The news helped them transfer a € 445m bridging loan they made in January in the junk bond market and avoid big losses © Simon Dawson / Bloomberg

Chicken farmer Boparan, led by Ranjit Singh Boparan, sold a £ 475million bond this week. Deals like this “would have been more difficult” without the double vaccine booster, said banker © Tim Scrivener / Shutterstock

For Boparan, the double breakthroughs were also helpful. Over the summer, the company had sought to refinance its bonds that would mature in 2021, but plans were frozen after investors sought out excessively high borrowing costs, according to two people familiar with the matter.

Dominic Ashcroft, co-director of Emea leveraged finance at Goldman Sachs, said that before the vaccine announcements, deals for companies like Boparan “would have been more difficult to achieve or would not reach the price points we have. have seen. . . . This week, they got a better level than two weeks ago.

Boparan’s £ 475million debt over five years, of which £ 50million was bought by Mr Boparan and his wife, gave investors an interest rate of around 7.6%, according to a pricing document viewed by the Financial Times.

Boparan declined to comment on this week’s deal or its potential refinancing over the summer.

Line chart of ICE BofA CCC and lower US High Yield Index (%) performance showing investors rushing into lowest-rated debt after positive vaccine news

U.S. companies at the bottom of the rating scale have also benefited from the post-vaccine euphoria. The yield of a U.S. triple-C-rated bond index fell 0.72 percentage points on the day Pfizer made its announcement to 10%, the largest single-day decline since May, as investors rushed into debt.

Operator of the Carnival cruise line, a company whose profits were beaten by the pandemic, has steadily exploited the bond market this year. This week he returned with his first unsecured transaction, a riskier offer because the bonds are not backed by its ships or other guarantees.

“The vaccine news has been a game-changer in the United States,” said Ben Burton, director of the American leveraged finance union at Barclays, adding that there had been a “dramatic” increase in appetite. for the risk.

In the loan market, Inspire Brands, which owns Buffalo Wild Wings and Arby’s restaurant chains, raised $ 2.6 billion this week to buy coffee chain Dunkin Brands. Bankers moved the deal’s completion date two days forward and lowered the company’s cost of borrowing to 3.25 percentage points from the benchmark rate, known as Libor, as a sign request for the agreement.

Falling borrowing costs and strong demand from investors to buy bonds or make loans have made debt markets an attractive alternative to fundraising by selling stocks, said Sarang Gadkari, co-director of global financial markets at the Bank of America.

Carnival has steadily tapped the bond market this year. This week, the struggling travel group launched its first debt deal not backed by its cruise ships or collateral assets © Tim Rue / Bloomberg

Uzbekistan has raised the equivalent of $ 750 million in dollars and Uzbek som from its second bond issue just after its market debut last year © Alamy

The vaccine news has also sparked a wave of offers from riskier borrowers in emerging markets, with investors betting the sector will be among the biggest winners of a faster economic rebound.

This week, Uzbekistan raised the equivalent of $ 750 million in dollars and Uzbek som from its second bond issue alone, after a market debut last year.

“Before the second wave of Covid, markets were open to emerging borrowers, but not en masse», Said Sergey Goncharov, fund manager at Vontobel Asset Management.

Developments in vaccines have made investors “much more comfortable buying these riskier names,” he added. “The portfolio managers have accumulated so much liquidity and they are looking for places to implement it.”

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