By Daniel Kruger and Sam Goldfarb
A long freeze in the junk bond market thawed Thursday as midstream energy company Targa Resources Partners LP became the first business to sell below-investment-grade bonds since November.
Targa, which has credit ratings at the upper end of the speculative-grade spectrum, sold $1.5 billion of eight and 10-year bonds, twice the amount initially expected. In another sign of a strengthening corporate debt market, investment-grade Anheuser-Busch InBev SA also sold $15.5 billion of bonds Thursday, the largest since October, as the beer giant moved to repay existing debt.
The Targa deal, which was also aimed at refinancing debt, ended 40 days without a high-yield bond sale, the longest stretch in data going back to 1995, according to Dealogic. Many low-rated companies would also like to refinance their debt or fund acquisitions and investors said the Targa deal could open the door, at least for 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 must pay over risk-free government debt. The corresponding fall 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 2018.
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 prior months.
The drop-off in borrowing is important because it could hamper companies' investments 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. Significant increases in their borrowing costs -- particularly as economic growth slows -- 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., 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, people familiar with the matter said.
Contributing 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 other sector.
The soft market could benefit investors in one way -- by giving them greater power over the terms of junk-bond sales when they do come.
"Leverage has switched all the way in favor of investors," said John Gregory, head of the leveraged syndicate desk at Wells Fargo Securities. "It's going to take time for issuers to come to terms with these higher rates."
Targa's debt sale comprised a $750 million bond due 2027 and a $750 million bond due 2029. The 2027 bonds were sold at par with a 6.5% coupon, lower than initial guidance from lead underwriter Bank of America Corp. but still comfortably above the yield on Targa's existing bonds of a similar maturity.
High-yield bond prices have rallied in the secondary market 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 manner that would threaten the economic expansion.
A still-growing economy should 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 Daniel.Kruger@wsj.com and Sam Goldfarb at email@example.com