New Junk-Bond Sale Planned After 40-Day Drought

Targa Resources Partners LP, a midstream energy company with ratings at the upper end of the speculative-grade spectrum, was preparing on Thursday to sell $750 million of bonds due 2027, in part to refinance debt coming due soon.

December was the first month since 2008 without a junk-bond sale, according to Dealogic. The Targa deal would end 40 days without a sale, the longest stretch in data going back to 1995. Volatility in financial markets, uncertainty about the economy and the recent drop in oil prices are discouraging riskier companies from issuing debt and investors from buying it, analysts say.

A successful high-yield sale would be a welcome sign for low-rated businesses, which regularly need to raise cash in the debt market. While it isn’t clear who might follow Targa if it completes its deal, many companies would also like to refinance their debt or fund acquisitions, and investors said the Targa deal could at least open the door for other businesses with strong track records.

Slack investor demand recently lifted to the highest level in more than two years the premium, or spread, that companies with junk credit ratings have to pay over risk-free government debt. The corresponding tumble in high-yield bond prices last quarter erased investors’ gains in what had been one of the few bright spots in the bond market in the first nine months of last year.

Junk-rated companies haven’t been completely absent from the debt markets. Issuance of so-called leveraged loans totaled $25 billion in November and December, according to LCD, a unit of S&P Global Market Intelligence. But that was still a significant slowdown from previous months.

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The drop-off in borrowing is important because it potentially complicates companies’ efforts to invest in plants, equipment or other business infrastructure, a key component of economic growth. Firms borrowing in the high-yield bond market are also among the most sensitive to changes in financial conditions. Rising borrowing costs, particularly while economic growth slows down, could boost their chances of bankruptcy.

Jim McDonald, chief investment strategist at Northern Trust, said recent losses in risky assets such as junk bonds and stocks could curb investors’ appetite for risk after a near-decadelong run of gains.

“Tighter financial conditions can lead to slower growth,” he said.

Volatility in the debt markets has caused many businesses to delay planned debt sales. It has also complicated at least one large acquisition, a leveraged buyout of aerospace-parts maker Arconic Inc., which is currently valued at about $14 billion including debt. The Wall Street Journal reported in July that private-equity groups were considering purchasing Arconic, in what would be one of the largest LBOs of recent years. But the sales process has dragged out in part because of difficulty securing debt financing in this environment, according to people familiar with the matter.

Debt-market volatility has complicated the sale of Arconic, whose Alcoa, Tenn., manufacturing facility is shown above. Photo: Luke Sharrett/Bloomberg News

One contributor to the stall is the recent rise in stock-market volatility, because high-yield bond prices tend to fall when stocks do. Another factor has been a decline in oil prices, because bonds backed by energy companies make up a larger share of major high-yield bond indexes than does any other sector.

The soft market could eventually benefit investors in one way—by giving them greater power over the terms of junk-bond sales when they do come. For years, investors have tolerated greater risks and company-friendly conditions as they pursued the debt’s relatively high yields.

“Leverage has switched all the way in favor of investors,” said John Gregory, director on the high-yield syndicate desk at Wells Fargo Securities. “It’s going to take time for issuers to come to terms with these higher rates.”

In the case of Targa, initial guidance by Bank of America Corp. , the deal’s lead underwriter, was for the notes to yield in the high 6% range, investors said, representing a sizable premium to the yield on Targa’s existing bonds.

Investors described Targa as the type of company they might expect to break the ice for the high-yield market, given its relatively solid ratings and familiarity to fund managers. The proposed yield on the debt reflects a market that might just be on the mend but still faces uncertainty following weeks of price declines and outflows from high-yield mutual funds.

The market stall could still persist in the near term because companies with junk ratings have managed to maintain relatively strong balance sheets and few urgently need cash, with the next big wave of refinancings expected in 2021, analysts said. At the same time, investors in risky bonds, who sometimes have difficulty trading them on demand, have been wary of placing bets for fear of getting stuck with bonds in a falling market.

Once they begin, dry spells in debt markets can persist, as few potential borrowers want to be first to test investors’ appetite for new bonds. Among the businesses currently waiting to issue debt is the automotive-battery business that Johnson Controls International PLC is selling to a group led by Brookfield Business Partners . That deal is expected to be funded with roughly $10 billion of debt. Investors and bankers say it could take smaller bond- and loan-sales to pave the way for larger deals, and the successful completion of one large transaction could open the door for others.


The junk-bond market was hit by a $101 billion net outflow of investor cash last year, even as high-yield bonds outperformed higher-quality debt for much of 2018, according to fund-tracker EPFR.

Recent days have brought some tentative signs that debt markets are poised to rebound. Tracking stocks, high-yield bonds have rallied since the end of last week, following a surprisingly strong jobs report and comments from Federal Reserve Chairman Jerome Powell that reassured investors the central bank won’t raise rates in a way that would threaten the economic expansion. The average junk-bond spread was 4.57 percentage points Tuesday, down from 5.37 percentage points on Jan. 3, its highest level since August 2016, according to Bloomberg Barclays data.

A still-growing economy should ultimately bode well for the high-yield market, said Jim Sarni, a managing principal and bond manager at Payden & Rygel. He is betting that the market will recover. But rather than purchasing particular bonds, he is buying swap contracts that increase in value as the gap between yields on junk bonds and Treasurys narrows.

Corrections & Amplifications
An earlier version of this article contained a misspelling of the name of Thornburg Investment Management’s Christian Hoffmann.

Write to Daniel Kruger at and Sam Goldfarb at

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