HowWealthWorks.com

[Suresh]

Wall Street Journal: Worry About Stretched Firms, Consumers Hits Debt Markets
...

...
While a large-scale credit meltdown looks unlikely now, rising bond yields will make it harder and more expensive for corporations and individuals to finance their businesses, homes, education and day-to-day expenses.

Investors are demanding higher interest rates on most corporate and asset-backed debt. The average junk bond now yields around 8.1 percentage points more than Treasury securities, or 11.5%. That compares with a yield of 11.1% and spread of 8.6 percentage points on March 17, according to data from Merrill Lynch & Co. Average spreads on bonds backed by auto loans and credit cards are three percentage points and 2.1 percentage points, respectively, close to their highs this spring.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Just think of that interest rate for a moment. 13.9%. What kind of profit margins do you need to be able to service an interest rate like that? You may be thinking that a low profit margin may be compensated for by huge amounts of sales transactions. Let's get real. Everyone and their brother who wanted to get into business was able to do so, when cheap and easy credit was available and sustainable business models didn't matter. Now that cheap and easy credit is no longer available, business models matter, and businesses are falling over each other to make sales. The writing is on the wall. Junk-rated companies will be unable to refinance their outstanding debt, and will go out of business.

For fun, keep an eye out for companies purchased by private equity funds with leveraged buy-outs. The private equity firms have loaded the purchased companies with debt to pay for dividends and management fees, thereby front-loading their return on investment. Such firms are likely not going to make it, as cheap and easy credit becomes increasingly unavailable, even if they are not junk-rated per se.
____________________________________________________________
Bloomberg: Junk Bond Spreads Rise to Record on Default Concern
...
The gap between high-yield bonds and similar-maturity Treasuries jumped 28 basis points to 1,124 yesterday, the most since Merrill began compiling spread data for its U.S. High- Yield Master II Index in Dec. 1996. The previous high was 1,120 basis points on Oct. 10, 2002.

Spreads on so-called junk bonds are soaring as collapsing credit markets and a slowing economy push up borrowing costs.
...
New York-based Merrill's distress ratio, which measures the percentage of high-yield companies with spreads of 1,000 basis points or more, soared to a record 40 percent from 27 percent yesterday. That implies a 11.3 percent default rate within a year, Fridson said. A basis point is 0.01 percentage point.

The U.S. speculative-grade default rate is 2.5 percent, up from a 25-year low of 0.97 percent at the end of 2007, according to Standard & Poor's. Junk bonds are securities rated below Baa3 by Moody's Investors Service and BBB- by S&P.

The gap between junk bond yields and Treasuries widened 260 basis points last month, the biggest rise on record, Merrill data show. Overall borrowing costs rose to an average of 13.9 percent, the highest in six years.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

WSJ: Junk-Bond Market Has Closed the Door
...
Yields Upward of 20% Make It Too Pricey for Borrowers; Zero Deals Made It in November

[Chart of corporate junk bond rates over the past 2 years]

About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies....
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

About half of U.S. corporate debt is junk-rated, and suppliers and customers (government, corporate, and consumer alike) are probably more leveraged now than during the Great Depression. So, it's hard for me to imagine a scenario where the coming junk bond default rate would not be higher than during the Great Depression.

The upshot is layoffs the magnitude of which most of us have never seen in our lives. Consider the Guardian article entitled "Fears of a million layoffs a month in corporate America."

[Suresh]

Bloomerg: Junk Bond Sales Set U.S. Record as Buyers Return
...
Companies with credit ratings below investment grade have sold a record $150.6 billion of U.S. corporate bonds this year as borrowers take advantage of surging demand for debt securities after last year’s credit freeze.

Sales of high-yield, high-risk junk bonds compare with $149.1 billion in all of 2006, the previous high, according to data compiled by Bloomberg. Last year the total was $64.3 billion. Bond issuance soared as bank lending to speculative- grade companies dropped to $147.5 billion, Bloomberg data show, down 84 percent from the record $919.5 billion in 2007, when lenders competed to finance leveraged buyouts.

Junk bond offerings have jumped since May, accounting for $105.4 billion of sales, as investors seized on the rally in high-yield securities and borrowers sought to refinance debt and avoid breaking loan covenants. Speculative-grade bonds have returned 54.8 percent this year, including reinvested interest, the most ever, according to Merrill Lynch & Co.’s High Yield Master II index.
...
The extra yield investors demand to own high-yield bonds instead of Treasuries has tightened 11 percentage points this year to 709 basis points as of Dec. 11, Merrill Lynch data show. Spreads widened to a record 21.8 percentage points in December 2008 after Lehman Brothers Holdings Inc. collapsed and credit markets froze.
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

The 2012 to 2014 time frame will increasingly be an inconvenient time to refinance corporate debt because yields will be rising. Much of the junk-rated debt will not be able to be rolled over, which means that we should see an uptick in corporate bankruptcies.
_____________________________________________________________
NYT DealBook: Wall of Junk Debt Maturities Looms, Moody’s Says

The boom in the high-yield debt markets has bought time and breathing space for companies needing extra financial flexibility. But that has come at a cost, according to the latest annual report by Moody’s Investors Service: more than $700 billion will come due between 2012 and 2014....

According to Moody’s, roughly 995 of 1,300 issuers have debt that matures between this year and 2014. The coming crush of maturities won’t materialize this year, with Moody’s calculating about $21 billion in high-yield debt maturing this year. But in 2014, that number swells to $338 billion in loans and bonds coming due.
...
2009 also saw a wave of high-yield debt offerings as well, some $145 billion in new junk bond issuances. Over all, speculative-grade companies raised about $200 billion in new debt for the year.

What’s especially notable is that about 78 percent of that debt was for refinancing existing obligations, Moody’s points out.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Zero Hedge: The 2014 HY Maturity Cliff: Bank of America's Take

We have previously discussed the maturity cliff in Treasuries, Commercial Real Estate, Financials and High Yield. Focusing on the latter, a recent report from Moody's, indicated that there is roughly $800 billion in high yield bonds maturing by 2014. Today, Bank of America jumped on the HY maturity warning bandwagon, discussing the "maturity wall" which while alarming, is estimated by BofA to be $600 billion, or materially less than Moody's estimates. ...

Bank of America characterizes their observations as follows:

[Suresh]

New York Times: Junk Bond Avalanche Looms for Credit Markets
...

...
Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.
...
In addition, she said, many companies whose debt matured in 2009 and 2010 have been able to extend their loans, but the extra breathing room is only adding to the bill for 2012 and after.

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.
...
The Treasury Department estimates that the federal budget deficit in 2012 will total $974 billion, down from this year’s $1.8 trillion, but still huge by historical standards.

Most critics of deficit spending have focused on the budget gap alone, but Washington will actually have to borrow $1.8 trillion in 2012, because $859 billion in old bonds will come due and have to be refinanced in addition to the deficit. By 2013 and 2014, $1.4 trillion will have to be raised annually.
...
Next in line are companies with investment-grade credit ratings. They must refinance $1.2 trillion in loans between 2012 and 2014, including $526 billion in 2012. Finally, there is the looming rollover of commercial mortgage-backed securities, which will double in the next three years, hitting $59.7 billion in 2012.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Financial Armageddon: 2007 Redux?

The market value of the high yield FINRA-BLP Active U.S. Corporate Bond Index relative to its investment grade counterpart has now exceeded the level seen in May 2007, at the peak of the credit bubble.

Chart of junk-rated U.S. Corporate Bond Index from 2002-present

If you ask me, it looks like risk-taking is back with a vengeance.
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: Junk Bonds in ‘Goldilocks’ Market Reach Record: Credit Markets
...
Companies worldwide issued $38.3 billion of junk bonds in March, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.
...
Sales soared as investors plowed a record $33.6 billion into speculative-grade funds this quarter, according to Cambridge, Massachusetts-based research firm EPFR Global. Bonds of Stamford, Connecticut-based Frontier Communications Corp. and Consol Energy Inc. of Pittsburgh, which sold a combined $5.95 billion of debt last week, rose about 2 cents on the dollar to 102 cents.

That’s a turnaround from February, when companies canceled sales at the fastest pace since credit markets began to freeze in 2007 amid concern that the inability of European governments to trim their budget deficits will threaten a global recovery.

Loan Revival

About $20 billion of high-yield, or leveraged, loans have been completed in February and March, compared with $38 billion for all of 2009, according to New York-based JPMorgan.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

FT Alphaville: Risky like it’s 2007
...
[H]igh-yield debt, better known as junk bonds, is now trading almost at par value.

From Forbes:

[Suresh]

Bloomberg: Junk Bond Sales Set Record as Investors Waiver: Credit Markets

Companies sold $33.7 billion of junk bonds in April, a record for the month....

The extra yield investors demand to own company debt instead of Treasuries rose 6 basis points last week to 149 basis points, or 1.49 percentage points, unchanged from the end of March and down from 176 basis points at the end of last year, Bank of America Merrill Lynch data show. Based on the 8,540 bonds worldwide in the index, yields fell to 3.925 percent from 3.949 percent on April 23.

Junk spreads widened 17 basis points to 561 basis points, after ending March at 584 basis points. Yields rose to 8.29 percent.
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: Bond Distress Highest Since ’09 as Sales Vanish: Credit Markets
...
Some 17 percent of junk bonds yield at least 10 percentage points more than Treasuries, up from 9.2 percent last month, Bank of America Merrill Lynch’s Global High-Yield Index shows. The jump is the biggest since the distress ratio rose 11 percentage points in November 2008, two months after Lehman Brothers Holdings Inc. collapsed.
...
U.S. distressed bonds have lost 10 percent in May, according to the indexes, amid speculation Greece and other nations in Europe with rising budget deficits may not be able to meet their debt payments, causing credit markets to seize up again. Junk bond sales plunged this month to the lowest level since March 2009, data compiled by Bloomberg show.
...
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of similar-maturity government debt fell 1 basis point to 195 basis points, or 1.95 percentage point, the first time spreads have narrowed since May 13, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The spread peaked at 511 on March 30, 2009, and dropped to as low as 142 on April 21. Average yields rose 4.5 basis points to 4.042 percent yesterday.

The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, fell as much as 11.18 basis points to 40.58 basis points, the lowest since May 21, before widening to 48.63 at 6:38 p.m. in New York. The spread has widened from 9.63 on March 24, the narrowest since 1993.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Ponzi finance units is that they can't finance debt out of current income.

These low-rated companies likely have business models that rely on low-cost debt financing that can be rolled over indefinitely. When that premise fails, so do their business models.
____________________________________________________________
Reuters: Low-rated U.S. firms may struggle to refinance debt: S&P

Low-rated U.S. companies may struggle to refinance more than $1.7 trillion in debt that comes due between 2011 and 2014 as growing economic concerns make banks and investors more reticent to lend, Standard & Poor's said on Wednesday.

The amount of risky bonds and loans that mature each year will steadily climb to a peak of $550 billion in 2014, S&P said in a report....
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Bloomberg: Bond Distress Rises as Goldman, JPMorgan Vary on Defaults
...
The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7 percent of the total, the highest share since December, according to Bank of America Merrill Lynch index data. The ratio compares with 9.2 percent on April 30, which was the lowest since November 2007.

Junk bond sales slumped to a 15-month low in June amid concern government efforts to control spiraling budget deficits will hamper global growth and drive up borrowing costs for the neediest borrowers. The 2010 default rate in the U.S. may jump as high as 6 percent by year-end from 1.3 percent currently, according to analysts at Goldman Sachs Group Inc.
...
The gap in yields between corporate and government debt ended last week at an average 195 basis points, or 1.95 percentage points, up from 149 at the end of March, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The last time spreads widened as much was when they expanded by 130 basis points to 489 in the final quarter of 2008, when Lehman Brothers Holdings Inc. collapsed.
...
_________________
Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.