Why are bonds harming the Sirius Minerals, Metro Bank and Aston Martin share prices?
A record amount was raised in the corporate bond market last month as businesses look to lock in low borrowing costs while investors search for yield. But not all companies are winning the confidence of the market.
Companies from around the world raised $434 billion by selling corporate bonds in September, around $5 billion higher than the previous record that was set in March 2017, according to Dealogic. The yields on offer by government bonds have dropped following a rally earlier this year, and this pushed investors toward corporate bonds that offer better returns.
More than a fifth of all gilts are currently offering negative yields, meaning investors are effectively paying to lend over $15 trillion to governments. In the UK, the average yield on a government bond is still positive but below 0.5%, whereas the safest corporate bonds are returning over 3%. It is easy to see why investors have become more interested in lending money to businesses rather than governments.
Low interest rates and increased appetite among investors have encouraged companies to tap the bond market. In the US, where demand for corporate bonds has been even stronger, Apple recently issued its first bond since late 2017, raising a total of $7 billion. Ford, Glencore and Verizon have been among the largest companies to have sold bonds in the UK this year.
So why are some UK companies struggling to tap the bond market?
Yet, despite the favourable conditions, not everyone is having an easy time raising the cash they need. Some have tried and failed, including Metro Bank and Sirius Minerals, while some that have managed to raise the cash have had to pay a heavy price.
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Aston Martin pays a high price to access debt
Aston Martin managed to raise $150 million in senior secured loan notes last month – but at a coupon of 12%. The luxury automaker is paying almost twice as much as other companies in the same credit bracket.
Investors demanded a higher yield because they deem Aston Martin to be higher risk. In July, Moody’s had downgraded the stock to its lowest speculative grade rating. The company is using the bulk of the proceeds to repay £90 million worth of debt, meaning it has had to launch two rounds of fundraising within less than a year of listing. That prompted S&P to follow Moody’s after the bond sale was completed.
It has failed to win the confidence of the market since it went public last year. Shareholders have already had to deal with a profit warning and shares are trading at just £5.04 as of 1 October, 2019. That’s a 73% drop from its initial public offer (IPO) price of £19.00.
The company is putting its hopes on its first SUV, the DBX. Yet with debt having reached a ceiling and deliveries not set to start until next year, concerns are growing over the carmaker’s financial health. Net debt at the end of July – before the bond was issued – stood at £732 million. It turned to a pre-tax loss of £79 million in the first half (H1) of 2019 and saw net operating cashflow plunge by two-thirds to just £21 million.
Metro Bank abandons bond sale following weak demand
Metro Bank was forced to abandon its plan to raise £200 million from the bond market after failing to find buyers – even after offering a coupon of 7.5%. Investors are wary about the perceived risk attached to the troubled challenger bank and were not swayed by the attractive rate. The bank has lost the trust of investors after revealing it needed more money earlier this year because it had miscalculated the amount required to protect itself against potential losses.
Metro Bank raised £375 million in equity in May and plugged the gap, but it was also required to raise new debt under MREL regulations. This is significant because it means Metro Bank has to raise some debt before the end of 2019 if it is to avoid falling foul of the regulations. The bank has said it intends to try again after its Q3 results on 23 October, when it hopes to allay any concerns over the bank’s finances or prospects. Still, it puts Metro Bank in a unique position. Although it can ask for more time, it will have to raise the funds regardless of what market conditions are like.
It suggests that Metro Bank is expecting to post a strong set of results later this month. Investors will also be hoping for further news on who will be taking over as chairman after Vernon Hill succumbed to the pressure following the accounting error.
Sirius Minerals pulls bond sale to leave company at risk
Sirius is another company that recently has had to abandon its plan to tap the bond markets because of weak demand. The company intended to raise $500 million in bonds to access a larger $2.5 billion credit facility from JPMorgan needed to build its huge polyhalite mine in North Yorkshire. Although it is a far more speculative play, it noted that no other company with a similar credit rating (of B/B-) has tried to raise debt through bonds recently. It was willing to offer a coupon of over 15% to drum up demand for what investors perceive as a high-risk bond, but it wouldn’t have been able to access the funds from JPMorgan if it did.
It has left Sirius and its project at risk. The firm has enough cash to last until the end of March 2020 and it may try to sell the bond again later this year, possibly after removing some of the riskiest elements of construction from the debt-financed part of its budget. Still, investors are far from convinced of its survival prospects considering its share price values Sirius at just £259 million – equal to one-fifth of what has been sunk into the project to date.
What lessons can investors take away?
Bonds are regarded as a safe investment with steady returns for investors. Corporate bonds typically offer higher yields than gilts to reflect the added risk of a company defaulting compared to an entire country. Plus, bondholders will be paid before shareholders should the company hit financial trouble. Currently corporate bonds are providing opportunities to investors in the space at a time when government bonds are unattractive.
The fundamental lesson for those that don’t directly invest in bonds is that the corporate bond market can still provide a valuable insight into the perceived risk attached to a company. Any business that is struggling to raise money in the bond market in the current climate or is paying a steep price in order to find buyers is likely to be in trouble. It also raises the likelihood that a company may have to consider other financing alternatives, such as equity, which comes with dilution.
It can also help identify possible acquisition targets. The inability to raise the funds they need and the limited time that both companies have means Metro Bank and Sirius Minerals could be bought out by larger counterparts that have the resources to save the businesses. Their weak financial positions make them vulnerable, and the weak pound could help fuel interest from overseas buyers.
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