The Wall Street Journal - 20.03.2020

B10| Friday, March 20, 2020 **** THE WALL STREET JOURNAL.

which employs 4,000 people,

suspended its shows in Las Ve-

gas. Prices of about $700 mil-

lion in loans the circus operator

mostly borrowed for its pur-

chase by private-equity firms in

2015 fell to 68 cents on the dol-

lar from around 94 at the start

of the month, according to data

from IHS Markit. Officials for

the company couldn’t

immediately be reached for

comment.

CLOs are highly susceptible

because they use borrowed

money to buy leveraged loans,

boosting the yield, and the risk,

of the investments. CLO manag-

ers issue bonds to buy bundles

of leveraged loans, then use

cash flow from the loans to pay

interest and principal on the

CLO bonds, pocketing the dif-

ference.

When downgrades and de-

faults mount, CLO managers

stop making payments on their

most junior bonds, prices plum-

met and the market for new

CLOs shuts down. Lower-qual-

ity CLO securities were the

worst performers this month

out of 29 types of debt mea-

sured byCitigroupInc. ana-

lysts, losing 22% through

March 13.

“CLO formation has come to

a grinding halt,” said Alex Jack-

son, chief investment officer

for Nassau Corporate Credit,

which manages six CLOs and

had planned to launch more

according to data from IHS

Markit. The company has bor-

rowed more in recent days on a

$1.75 billion revolving loan—ba-

sically a line of credit—to build

cash as tourism and travel

plummet. Prices of the revolver

have fallen to around 79 cents.

Other companies won’t have

the same access to cash. “The

real risk is in those incremental

borrowers, the borrowers who

need access to capital that

could dry up,” said Frank Os-

sino, senior loan portfolio man-

ager at Newfleet Asset Manage-

ment, which holds about $2

billion of leveraged loans in the

$10 billion of investments it

manages.

Cracks appeared in the mar-

ket last week as businesses

sent workers home, travel

slowed, sports leagues halted

play and predictions about the

virus’s economic impact grew

increasingly dire.

Moody’s downgradedCirque

du SoleilInc. on Wednesday to

a credit rating “in, or very near,

default” after the company,

Low-rated companies

borrowed more

against their assets

than ever before.

this year. “It does feel like the

market accelerated into a panic

over the course of the week.”

Loan markets seized up

briefly the last time stocks

tumbled in December 2018, but

the declines are much sharper

now and many fear a more pro-

longed disruption. During the

last financial crisis, issuance of

new leveraged loans slowed to

a trickle for about a year start-

ing in August 2008, according

to data from S&P Global Market

Intelligence.

Also worrying, it became in-

creasingly difficult last week to

trade existing loans of large

companies normally viewed as

comparatively safe bets. The

gap between what sellers were

asking and what buyers wanted

to pay for Dell loans widened to

2 percentage points last week

from about a half-point nor-

mally. On March 9, too few

banks were making markets in

the $5.3 billion loan of fast-

food chainRestaurant Brands

International, which owns

Burger King, to accurately price

the debt, according to IHS

Markit.

If trading dries up, investors

and analysts hope the Fed can

intervene to avoid a credit

crunch. The central bank on

Sunday slashed interest rates

to near zero and said it would

buy $700 billion in Treasurys

and mortgage-backed securities

to help ease stress in the finan-

repackaged many of the loans
into, causing credit markets to
seize up and leave already in-
debted companies without ac-
cess to fresh cash. The conse-
quences could cascade: A wave
of defaults and bankruptcies,
forcing job cuts and amplifying
the economic slowdown.
The impact will likely be
long and drawn-out. Most loans
don’t start coming due until
2022 and the hardest-hit sec-
tor—energy—is a small compo-
nent of the market. Still, loan
prices can fall sharply well be-
fore companies run out of cash,
hurting investors who own the
debt. And as business dries up
for some companies, they may
not be able to stay current on
their existing loans.
Leveraged loans suffered
their worst run since the finan-
cial crisis this month when a
widely tracked index lost about
16% of its value. Prices for
loans to 24 Hour Fitness
Worldwide, which operates a
chain of gyms, fell to about 44
cents on the dollar this week
from 80 cents in February, ac-
cording to analytics firm Ad-
vantageData Inc. Prices of loans
to airlines such asUnited Air-
lines HoldingsInc. andAmeri-
can AirlinesGroup Inc. de-
clined about 10% in the first
two weeks of March, more than
any full-month loss since Octo-
ber 2008, according to S&P
Dow Jones Indices.
Repackaging loans into bun-
dles called “collateralized loan
obligations” became popular in
the 2000s, alongside similar
techniques employed to market
mortgage-backed bonds. Unlike
mortgage bonds, very few CLOs
defaulted in the 2008 financial
crisis. That record and their
high yields have made CLOs
popular in recent years, but
they are susceptible to violent
price swings and have been one
of the worst-performing debt
investments this month.
Loan investors remain hope-
ful that the virus will subside
and that its aftershocks will be
brief. But with the amount of
loans outstanding about twice
as large as in 2008, according
to data from S&P Global, a re-
cession will likely trigger a
larger wave of defaults and
heavier losses on their debt
than the dot-com bubble or the
financial crisis, analysts say.

Continued from page B1

buying program, known as

quantitative easing, by €750

billion ($799.7 billion) this year

in an emergency move to cush-

ion the economy from the cor-

onavirus outbreak.

This move adds to an an-

nouncement earlier this month

to temporarily increase the

program by €120 billion. The

central bank’s monthly bond

purchases now total €215 bil-

lion, according to research by

RBC Capital Markets.

“This is a much better

package, it should really make

[Europe’s] government bond

markets a bit more orderly

now,’’ said Seamus Mac Go-

rain, head of global rates at

J.P. Morgan Asset Manage-

ment.

Investors were spooked last

week when ECB President

Christine Lagarde said it

wasn’t the role of the central

bank to narrow borrowing

costs among euro member

states. She later rowed back

the comments, but markets

took them as a signal that the

ECB may not be willing to help

weaker economies, sparking a

selloff in Italian, Spanish and

Greek government debt.

Wednesday’s stimulus plan

was structured to address

those concerns. Central banks

including the Federal Reserve

and ECB have unveiled a raft

of funding programs in recent

weeks that have failed to calm

markets. That the initial reac-

tion to the ECB plan was posi-

tive has helped restore some

confidence in their tools.

The difference in yields be-

tween Italian government debt

and similar debt issued by

Germany—a barometer of eu-

rozone jitters—narrowed

Thursday, falling to 2 percent-

age points, down from 2.47

Wednesday. The difference

was as low as 1.3 percentage

points in February, before the

outbreak took hold.

“Central banks have a lot of

firepower and can control con-

ditions pretty well in markets

when intervening directly,’’

Mr. Mac Gorain said.

Investors embraced a likely

softening of the ECB’s rules on

issuer limits, which sets

boundaries on the proportion

of a country’s outstanding

debt the ECB can own. This

could result in the central

bank owning more bonds is-

sued by peripheral nations,

particularly Italy, as the insti-

tution seeks to support the

country that has become the

epicenter of the outbreak.

On a practical level, the

ECB’s enlarged program pro-

vides a deeper-pocketed buyer

for the large waves of debt

that will be issued by Euro-

pean countries to fund the fis-

cal stimulus programs that

have been recently announced.

Italy has said it would

spend €25 billion to counter

the coronavirus, adding to its

debt pile that already stands

at around 135% of gross do-

mestic product.

For the first time, the ECB

also included Greek govern-

ment debt on its shopping list,

opening the door for the coun-

try to increase its bond issu-

ance.

While some investors are

wary of the longer-term con-

sequences of limitless quanti-

tative easing, the primary fo-

cus should now be on

supporting the economy

through this shock, according

to Peter Schaffrik, a global

macro strategist at RBC Capi-

tal Markets.

Yields on Italian govern-
ment bonds fell Thursday in
response to the European Cen-
tral Bank’s emergency stimu-
lus plan, partially filling in a
dangerous fault line in the re-
gion’s financial
markets.
The yield on It-
aly’s benchmark
10-year government bond fell
to 1.7% from as high as 3% on
Wednesday. Greece’s equiva-
lent yield plummeted 1.4 per-
centage points to below 2.5%,
down from over 4% Wednes-
day. Prices rise as yields fall.
The ECB said Wednesday
that it would ramp up its bond-

BYANNAHIRTENSTEIN

Italian Bond Yields Fall on ECB Stimulus

CREDIT
MARKETS

Companies that borrow in

the junk loan market now are

far weaker financially than

those in that era. Borrowers

with loans Moody’s Investors

Service rated at the lowest

rungs of the junk-debt ladder—

B3 or lower—made up 38% of

the market in July compared

with 22% in 2008.

“Investors will probably be

surprised by the extent of their

losses on loans compared with

their historical losses,” said

Oleg Melentyev, a strategist at

Bank of America Corp. He cal-

culates that about 29% of out-

standing leveraged loans will

likely default cumulatively in

the next credit downturn, com-

pared with an average of about

20% by junk-rated companies

during the 2007 to 2009 pe-

riod. Worse yet, investors will

likely recover less money:

about half of their original in-

vestment, compared with 58%

back then.

The storm is rocking even

well-established leveraged-loan

borrowers like hotel chainHil-

ton Worldwide HoldingsInc.

The company took out a $2.6

billion loan in June to refinance

debt left over from whenBlack-

stoneGroup bought it over a

decade ago, according to data

from LevFin Insights.

Prices for the loan, stable at

100 cents on the dollar in late

February, have now fallen to

about 83 cents on the dollar,

cial markets.

On Tuesday, the Fed an-

nounced plans to start making

loans to American companies in

a bid to unclog the $1.1 trillion

market for short-term IOUs

called commercial paper, which

companies use to finance day-

to-day business operations such

as payroll expense.

Eric Rosengren, president of

the Federal Reserve Bank of

Boston, said earlier this month

that without a stronger re-

sponse from Congress and the

White House to combat any

downturn, the Fed would need

Congress to authorize new

tools to spur growth, such as

allowing the central bank to

purchase corporate bonds and

other private-sector assets.

A high level of corporate

debt “is one of the negative

outcomes of having low

interest rates for a long time,”

he said. “We’ll see how much of

a problem that is for unemploy-

ment.”

Worries over the risk in the

leveraged-loan market have

been overstated, said Lee

Shaiman, head of the Loan Syn-

dications and Trading Associa-

tion trade group. The biggest

industries in the market, like

business services and technol-

ogy, are less affected by the vi-

rus than others, he said. Lower

interest rates have cut debt ex-

penses for most borrowers sig-

nificantly in the past month.

Corporate

Debt Poses

Threat

Moody’s downgraded Cirque du Soleil’s credit rating to ‘in, or very near, default’ after the suspension of shows in Las Vegas. A performance in Munich last month.

HANNES MAGERSTAEDT/GETTY IMAGES

year government bonds briefly

jumped more than a full per-

centage point to 2.5%—an

enormous move reflecting in-

vestors’ anxiety to sell assets

and get hold of cash. Bond

yields rise when prices fall,

and they rarely move more

than a few hundredths of a

percentage point on most

days.

The Aussie dollar tumbled

Soaring demand for the
dollar is exacerbating disloca-
tions in markets around the
world, sending other curren-
cies tumbling and pressuring
companies and investors that
need the U.S. currency to pay
off debts and meet other obli-
gations.
Many Asian currencies
swooned and stock indexes
sank to multiyear lows Thurs-
day as investors dumped as-
sets and paid dearly to swap
local currencies for U.S. dol-
lars.
South Korea, whose equity
markets have benefited from
relatively high foreign invest-
ment in recent years, has seen

BYCHONGKOHPING
ANDSERENANG

BANKING & FINANCE

billions of dollars of outflows

this month. The country’s Ko-

spi stock index tumbled 8.4%

Thursday to its lowest level

since July 2009—and the Ko-

rean won fell to its lowest

point in a decade—as institu-

tions frantically sold stocks

and changed their money into

dollars.

Government bonds sold off

as well, prompting Korea’s

central bank to pledge to buy

more than $1 billion of them

to stabilize the markets.

“The demand for U.S. dol-

lars is profound right now,”

said Stuart Oakley, the Singa-

pore-based global head of flow

foreign exchange at Japanese

brokerage Nomura.

“People...have clearly strug-

gled to acquire dollars in re-

cent days,” he said, adding

that some companies with

outstanding U.S. dollar debt

are hoarding the currency in

case they can’t get hold of it

later.

In Australia, yields on 10-

to an 18-year low of 0.551 per

U.S. dollar, while the country’s

benchmark stock index also hit

multiyear depths. In an emer-

gency meeting Thursday, Aus-

tralia’s central bank slashed its

benchmark interest rate to

0.25% and pledged to buy

more bonds.

On Thursday, following the

selloff in Asian markets, the

Federal Reserve said it would

establish a temporary program

to lend billions of dollars at

near-zero interest rates to

central banks in Australia,

South Korea and seven other

countries.

It said the so-called cur-

rency swap lines would help

alleviate strains in financial

markets and be in place for at

least six months.

To help address a global

dollar shortage, the Fed over

the weekend had eased the

terms on similar swap lines

with five central banks in

leading economies.

Indonesia’s currency, the

rupiah, earlier on Thursday

weakened to levels last seen

during the Asian financial cri-

sis in the late 1990s, a worry-

ing sign for jittery investors.

The country’s benchmark

stock index plummeted nearly

11% to a four-year low.

Indonesia is one of the

most vulnerable countries to

foreign capital flight during

times of economic stress, said

Song Seng Wun, an economist

at CIMB Private Banking in

Singapore. Indonesia’s central

bank reduced its benchmark

lending rate by a quarter per-

centage point Thursday, its

second cut this year.

The issue plaguing markets

is that investors seeking shel-

terfromextrememarket

moves are preferring to hold

U.S. dollars, making them

more scarce for businesses

and other market participants

that need them.

—James Glynn

and Paul J. Davies

contributed to this article.

The World Desperately Seeks Dollars

Investors are dumping

assets and paying

dearly to swap out of

local currencies

TheWSJDollarIndex, which tracks the U.S. currency against a

basket of 16 other currencies, hit its highest level since 2002.

Source: Dow Jones Market Data

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60 Weekly

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