US investors scared of worries about Delta variant

Updates on corporate bonds

Investors have backed down on the debt of some of the US companies hardest hit by the Covid, after reassessing the pace of the US economy reopening in light of the spread of the Delta variant of the coronavirus.

Bonds issued by cruise lines, theater operators and retailers all fell in price last week, as more companies delayed plans to return workers to their offices due to the Delta escalated, others choosing to impose vaccine requirements on their staff.

The movie theater operator and beneficiary of the meme share craze AMC Entertainment’s $ 1.5 billion bond, sold last year to help it survive the first wave of Covid-19, fell from nearly 90 cents on the dollar to about 85 cents on Friday, a little lower again on Monday.

The price of the $ 1 billion office supply firm Staples bond maturing in 2027 rose from over 97 cents on the dollar to 94.5 cents on Friday, before surpassing 95 cents to start this week .

Royal Caribbean and Viking cruise ship operators have also suffered recent drops in the price of their bonds.

Financial groups Wells Fargo and BlackRock have joined with tech giants Apple and Amazon in delaying the return of staff to their offices. United Airlines has also responded to nervousness over the spread of the Delta variant by demanding that all staff be vaccinated by the fall.

“With the rise of Covid, investors are starting to get nervous,” said John McClain, portfolio manager at Brandywine Global Investment Management. “Investors should pay attention to the UK as their experience with the most recent peak in cases driven by the Delta variant is a leading indicator. There may be additional volatility given the lower liquidity in summer. “

Movements in sectors affected by Covid are a sign that investors are reducing their bets on the pace of the recovery after last year’s slowdown.

The liquidation continued on Monday, made worse by a drop in oil prices that led to debt of energy companies.

However, analysts and investors such as McClain do not see the recent nervousness significantly altering the outlook for corporate debt markets, with new financing still available for companies in need and the economic recovery still underway. , although at a slowing pace.

“Delta is an obvious obstacle, but we are essentially still on the road to recovery,” said Oleg Melentyev, analyst at Bank of America.

The additional yield above treasury bills, or “spread”, required by investors to hold riskier high yield bonds rose to around 3.5 percentage points, from 3.16 percentage points in early July, according to ICE BofA index data.

The increase in risk premiums was particularly pronounced at the lowest rated end of the corporate bond ladder. The triple C-rated bond spread fell from a low of 5.88 percentage points last month to 6.75 percentage points on Monday.

Delta’s rise to power is also affecting the debt of companies already facing pressure from the supply chain. During last week’s earnings call for Itron, chief executive Thomas Deitrich said the maker of meters and sensors for energy and water utilities was experiencing “supplier plant disruptions, logistical constraints, shortages of raw materials and components resulting from the pandemic “.

Itron’s $ 460 million bond maturing in 2026 fell from 102 cents on the dollar to less than 90 cents after the call. It has since fallen to just under 93 cents.

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Carol M. Barragan

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