Japan Companies Scoops Up Cash in Busiest Day for Bonds in 2020

Olivia Konotey-Ahulu and Allan Lopez

(Bloomberg) -- Companies are taking a break from selling debt in the U.S. as markets brace for Covid-battered earnings results beginning next week.

Measures that weigh corporate credit risk have risen to nearly two-week highs amid a surge in U.S. coronavirus cases while investment-grade and high-yield spreads have backed up slightly, contributing to a softer issuance tone in both markets. No new bonds were announced Friday morning, though Carpenter Technology Corp. and Blue Racer Midstream LLC are set to wrap their note offerings later today.

It’s a different story in Europe, where borrowers are ignoring warning signals from default-risk gauges and continue to sell new debt in the primary credit market ahead of a run of likely bad news during the second-quarter corporate earnings season.

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New bond issuance in Europe has surged above forecasts and is set to to exceed 31 billion euros ($35 billion) for the week. Companies around the world shoring up liquidity reserves to protect against the impact of Covid-19 have already led to record new debt sales which are now 56% ahead of the rate seen a year ago.

“Most corporates have already raised the cash they think they need to face the upcoming challenges,” said Juan Valencia, a credit strategist at Societe Generale. “We expect defaults to pick up over the next 12 months but they should happen later on, as governments are still trying to safeguard jobs and companies.”

But the mood is starting to sour. Default risk on corporate debt rose for the fourth session in a row on Friday amid coronavirus flare-ups across the U.S., Hong Kong, Tokyo and elsewhere. Grim news during the approaching earnings season that will probably reveal extensive damage to businesses from the pandemic is also likely to depress investor sentiment.

That could also kick off a flurry of credit downgrades with a far-reaching impact as a third of investment-grade debt is already at the lowest score above junk status and on negative outlook.

U.S.

Retail risk was highlighted overnight as Muji U.S.A. Ltd. filed for bankruptcy, the latest company to do so from a sector that’s been reeling from the Covid-19 pandemic.

More than 110 companies have declared bankruptcy in the U.S. since the coronavirus has gripped marketsInvestment-grade bonds are at a fresh high, with yields at record lows, following another week of inflated fund inflows. Junk credit looks more vulnerable after a second day of losses, with investors favoring higher-quality debt backed by the FedInvestors poured $7.18 billion into funds that buy U.S. investment-grade debt in the week ending July 8, continuing a record amount of receipts since late May, according to data from Refinitiv Lipper

Europe

The European Central Bank is likely to expand its 1.35 trillion euro bond purchase program by December with an extension and a top-up of 500 billion euros, according to a Bloomberg survey of economists.

See also: Gear up for a bumpier ride in Europe’s credit marketInvestors are gearing up for a bumpy ride in European credit, with bouts of volatility, even as they have a positive longer-term view on the marketItalian state lender Cassa Depositi e Prestiti is in preliminary talks to buy a stake in some of Telecom Italia SpA’s fixed-line assets, people familiar with the matter saidThe turnaround plans of Scandinavian airline SAS AB suffered a setback after the company canceled a meeting with bondholders due to a lack of support for proposed amendments.

Asia

Japanese companies led by Tokyo Electric Power Co. Holdings Inc. priced on Friday the most yen corporate bonds of any day this year, as firms build cash buffers to gird against the impact of the pandemic.

Corporate bond sales in Japan are rebounding after they tumbled in April and May, as the Bank of Japan and Prime Minister Shinzo Abe’s government roll out record stimulus to support the economyYen corporate note sales jumped 99% in June from a year earlier

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