Market turmoil derails $750m Neuberger Berman junk bond raising

Turbulence on financial markets has derailed a $750m raising for a junk bond fund and triggered hundreds of millions in refunds.

Trader Steven Kaplan watches the numbers on the floor of the New York Stock Exchange on Monday Picture: AP

Turbulence on financial markets has derailed a $750m raising for a junk bond fund and triggered hundreds of millions of dollars in refunds after “extreme market volatility” pushed Neuberger Berman’s Global Corporate Income Trust to trade at a discount to its net assets.

In what amounts to the first corporate victim of the wild market fluctuations over the past week, global investment manager Neuberger Berman on Tuesday told investors it was pulling its entitlement offer for its $1bn fixed income listed investment trust.

The New York-based Neuberger Berman, which manages $US340bn ($520bn), announced the raising in January but will now refund all amounts received by the fund manager.

The move comes after the high-yield bond market had its worst week since 2011 as investors worried about the potential effects of the coronavirus outbreak, with the spread on sub-investment grade corporate debt over the yield on government bonds blowing out by 1.4 per cent in a week.

Aside from a sharp widening in the spread during the European debt crisis, last week was the biggest jump in junk bond spreads since the 2008 global financial crisis, signalling unwillingness by investors to hold risky corporate debt as the economy falters in the face of a growing pandemic threat.

Investors in US junk bonds pulled the most money out of the risky instruments last week in more than a year amid the market sell-off. In a statement authorised by managing director of the trustee responsible for the fund, Mick O’Brien, Neuberger Berman said it had determined not to proceed with the raising “due to extreme market volatility resulting in ­material discounts in the trading prices on the ASX in comparison to the net tangible asset per unit” of the listed investment trust.

The decision to scrap the raising was a sharp turnaround after Neuberger Berman on Monday extended the entitlement offer following the wild 10 per cent plunge in the Australian market over the previous week.

Shares in the Global Corporate Income Trust, which offers investors exposure to hundreds of high-yield, below investment grade corporate bonds, sunk as low as $1.91 on Monday — well below the net tangible asset value of about $2, and down on the entitlement offer price of $2.05.

After it dumped the raising, the shares bounced back to close at $2.01 on Tuesday.

In its half-yearly statement last week, the Global Corporate Income Trust warned the “uncertainty around the impact of the coronavirus and geopolitical event risk including the upcoming US presidential elections and policy responses to recent events in China” was a main risk to the fund’s outlook.

“This could continue to lead to periods of spread volatility,” the trust said.

“We believe our portfolio is well positioned to provide downside protection as market volatility rises and that we will look to tactically take advantage of the increased volatility to add to credits with more stable and/or improving fundamentals and attractive valuations.”

The trust was listed on the ASX in 2018 and holds a suite of junk bonds issued by companies such as oil company Petrobas, French telco Altice, state-owned enterprise Argentine Water and Sanitation, and French casino group Guichard Perrachon. The average credit rating for the fund is BB-.

Global investment firm KKR’s listed debt fund KKR Credit on Monday issued an investor update after its shares fell 11 per cent at the end of last week.

The $1bn fund, which invests mostly in North American corporate debt, told investors its underlying investments were in companies that had “relatively steady revenue” and earnings growth.

It said money managers were moving funds to higher-quality companies.

“Investors have flocked towards buying higher-quality assets” such as companies with a BB credit rating, which created an ­opportunity for KKR that was “willing to do the work and understand borrowers with a B or CCC credit rating”, the company said.

With global interest rates at record lows, investors have pushed money into riskier investments to secure higher investment returns.

With trillions of dollars at their disposal, big fund managers have had to look towards bonds with lower credit ratings, including non-investment-grade assets known as junk bonds that pay a higher rate of interest.

US corporate debt has grown to a record $US15 trillion, at the same time that low interest rates have allowed low-rated companies to build up debt.

Global credit ratings agencies assess corporate and government bonds on a scale from AAA to C. Anything below BBB is classed as “junk”.