The percentage of corporate bonds considered in distress receded to a five-month low as record sales of high-yield debt and declining borrowing costs convince investors that the riskiest companies can pay their lenders.
The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds declined to 290, or 12 percent of the total, the lowest share since April and down from 15.9 percent at the end of August, according to Bank of America Merrill Lynch index data. A decline of 3.23 percentage points last month was the most since March.
Junk-rated borrowers globally raised a record $98.7 billion last quarter selling bonds as investors plow cash into the market to grab higher relative yields, helping the weakest companies shore up their balance sheets. Defaults by high-yield issuers fell to 4 percent last month from 6.2 percent in June, Moody’s Investors Service said today.
“There’s a tremendous yield hunger that isn’t satisfied and that’s pushing up the prices in all the bottom-tier names,” said Margaret Patel, who oversees about $1 billion of assets as a fund manager at Wells Fargo & Co. in Boston. “If you want capital appreciation, there’s only an ever shrinking universe to get that sort of yield.”
Investors poured $480.2 billion into debt mutual funds in the two years ended in June, more than went into stock funds during the Internet bubble, according to the Washington-based Investment Company Institute.
Deutsche Bank Offering
Debt sales, distressed exchanges and other lending has helped high-yield companies push out their maturities, slashing the amount of bonds and loans they have coming due from 2011 to 2013 by 26 percent since 2009 to $281.4 billion, according to Bank of America data.
Elsewhere in credit markets, Deutsche Bank AG began marketing commercial-mortgage bonds after JPMorgan Chase & Co. sold the largest offering of the securities this year. American International Group Inc.’s plane-leasing unit repaid a $2 billion loan. Securities from London-based Barclays Plc were the most traded U.S. corporate debentures.
Deutsche Bank is offering $856.6 million of securities tied to 42 loans secured by 63 properties, according to a person familiar with the transaction, who declined to be identified because terms aren’t public.
Default Swaps Decline
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.6 basis point to 98.1 basis points as of 5:29 p.m. in New York, according to index administrator Markit Group Ltd. That’s the lowest since May 12.
The index, which typically falls as investor confidence improves and rises as it deteriorates, has declined 6.1 basis points this week. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Contracts protecting against losses on the debt of International Lease Finance Corp. fell 6 basis points to 466, the lowest since May 4, according to London-based data provider CMA, after the Los Angeles-based unit of AIG said it repaid a credit line, improving financial flexibility. The contracts have decreased 180 basis points since Aug. 31, CMA data show.
Leveraged Loans
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, rose 0.12 cent to 90.65 cents on the dollar, the highest since May 18. Speculative-grade, or high-yield, loans and bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.
Commercial paper outstanding rose $31.4 billion to $1.12 trillion in the week ended Oct. 6, the highest since the period ended March 10, according to data compiled by Bloomberg.
Barclays debt was the most actively traded with 205 transactions of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Barclays Bank Plc, its banking unit, sold $1.25 billion of 10-year subordinated notes in dollars on Oct. 6, Bloomberg data show. The securities rose 2 cents today to 102 cents on the dollar, Trace data show.
In emerging markets, relative yields fell 1 basis points to 271 basis points, and are unchanged since last week, JPMorgan index data show.
Record Sales
Sales of at least $9.2 billion of junk bonds in October brings the global total to $259.3 billion, surpassing the previous full-year record of $209.2 billion in 2009, Bloomberg data show. Most of the offerings took place in U.S. dollars, with sales of $206.4 billion this year.
“This is obviously a case of too much money chasing too few good bonds,” said Don Ross, who helps oversee $9.5 billion of assets as global strategist for Titanium Asset Management Corp. in Cleveland. “It’s just money changing hands and corporations being the net gainer by being able to issue cheaper and have better balance sheets. In the long run that will help the economy, but holy mackerel, at what cost?”
U.S. junk bonds yield 4.3 percentage points more than investment-grade debt, compared with 2.16 percentage points in June 2007 before the credit crisis, Bank of America Merrill Lynch index data show. Prices of the speculative-grade securities have climbed to 101.82 cents on the dollar from as low as 55 cents in December 2008, index data show. The bonds reached face value last month for the first time since June 2007.
Investors put $2.6 billion into distressed debt funds in the first half of the year, according to Hedge Fund Research Inc. in Chicago.
‘Very Nice Opportunities’
Money is pouring in as U.S. distressed bonds have returned 16.3 percent in 2010, following gains of 117 percent in all of 2009, according to Bank of America Merrill Lynch’s U.S. High- Yield Distressed Index. The entire market for high-yield bonds is up 13.7 percent.
“We are finding very nice opportunities in the secondary market,” said Marvin Barth, chief investment strategist at Tennenbaum Capital Partners LLC in Santa Monica, California. “We’re having a great opportunity to originate very nice deals for us that pay very high rates of return and also help these companies grow.”
Tennenbaum, which had been seeking about $1 billion to buy distressed debt, also lends directly to “middle-market” companies that don’t have as much access to capital markets, Barth said on Bloomberg Television’s “InBusiness.”
The percentage of distressed securities rose as high as 16.1 percent in May, climbing from a 22-month low in April of 9.2 percent, as concern that one of Europe’s most indebted nations might default led investors to flee the riskiest assets, Bank of America Merrill Lynch index data show.
Falling Default Rate
Moody’s forecasts the global corporate default rate will fall to 2.7 percent by year-end, dropping to 2 percent by the third quarter of 2011.
“Defaults have plunged,” said Patel, who manages Wells Fargo’s Advantage Diversified Capital Builder Fund and Advantage Diversified Income Builder Fund. “The credit markets have been extremely favorable. Some companies that have been borderline credit quality have been able to refinance.”
Moody’s said in an Oct. 4 report that it raised the speculative-grade liquidity ratings of eight companies in September compared with four cuts, the 17th month in a row in which upgrades outpaced downgrades.
‘Within Shouting Distance’
Investors are demanding an extra 606 basis points to own junk bonds rather than government debt, the lowest since May 5, five days before the European Union announced a $1 trillion bailout of its most indebted nations, according to Bank of America Merrill Lynch’s Global High-Yield Index. Absolute yields fell to 7.83 percent today from this year’s high of 9.62 percent on June 10.
High-yield spreads in the U.S., which fell today to 613 basis points, are “within shouting distance” of the historical average of 598 basis points, a milestone that doesn’t indicate the market has “run too far too fast,” Martin Fridson, global credit strategist at BNP Paribas Asset Management, said Oct. 6 in an e-mail.
The default rate implies a spread of 484 basis points, wrote Fridson, who is based in New York and began his career as a corporate debt trader in 1976.
“Investors are being well compensated for risk and talk of a bubble in high-yield bonds is misguided,” Fridson said.
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The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds declined to 290, or 12 percent of the total, the lowest share since April and down from 15.9 percent at the end of August, according to Bank of America Merrill Lynch index data. A decline of 3.23 percentage points last month was the most since March.
Junk-rated borrowers globally raised a record $98.7 billion last quarter selling bonds as investors plow cash into the market to grab higher relative yields, helping the weakest companies shore up their balance sheets. Defaults by high-yield issuers fell to 4 percent last month from 6.2 percent in June, Moody’s Investors Service said today.
“There’s a tremendous yield hunger that isn’t satisfied and that’s pushing up the prices in all the bottom-tier names,” said Margaret Patel, who oversees about $1 billion of assets as a fund manager at Wells Fargo & Co. in Boston. “If you want capital appreciation, there’s only an ever shrinking universe to get that sort of yield.”
Investors poured $480.2 billion into debt mutual funds in the two years ended in June, more than went into stock funds during the Internet bubble, according to the Washington-based Investment Company Institute.
Deutsche Bank Offering
Debt sales, distressed exchanges and other lending has helped high-yield companies push out their maturities, slashing the amount of bonds and loans they have coming due from 2011 to 2013 by 26 percent since 2009 to $281.4 billion, according to Bank of America data.
Elsewhere in credit markets, Deutsche Bank AG began marketing commercial-mortgage bonds after JPMorgan Chase & Co. sold the largest offering of the securities this year. American International Group Inc.’s plane-leasing unit repaid a $2 billion loan. Securities from London-based Barclays Plc were the most traded U.S. corporate debentures.
Deutsche Bank is offering $856.6 million of securities tied to 42 loans secured by 63 properties, according to a person familiar with the transaction, who declined to be identified because terms aren’t public.
Default Swaps Decline
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.6 basis point to 98.1 basis points as of 5:29 p.m. in New York, according to index administrator Markit Group Ltd. That’s the lowest since May 12.
The index, which typically falls as investor confidence improves and rises as it deteriorates, has declined 6.1 basis points this week. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Contracts protecting against losses on the debt of International Lease Finance Corp. fell 6 basis points to 466, the lowest since May 4, according to London-based data provider CMA, after the Los Angeles-based unit of AIG said it repaid a credit line, improving financial flexibility. The contracts have decreased 180 basis points since Aug. 31, CMA data show.
Leveraged Loans
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, rose 0.12 cent to 90.65 cents on the dollar, the highest since May 18. Speculative-grade, or high-yield, loans and bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.
Commercial paper outstanding rose $31.4 billion to $1.12 trillion in the week ended Oct. 6, the highest since the period ended March 10, according to data compiled by Bloomberg.
Barclays debt was the most actively traded with 205 transactions of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Barclays Bank Plc, its banking unit, sold $1.25 billion of 10-year subordinated notes in dollars on Oct. 6, Bloomberg data show. The securities rose 2 cents today to 102 cents on the dollar, Trace data show.
In emerging markets, relative yields fell 1 basis points to 271 basis points, and are unchanged since last week, JPMorgan index data show.
Record Sales
Sales of at least $9.2 billion of junk bonds in October brings the global total to $259.3 billion, surpassing the previous full-year record of $209.2 billion in 2009, Bloomberg data show. Most of the offerings took place in U.S. dollars, with sales of $206.4 billion this year.
“This is obviously a case of too much money chasing too few good bonds,” said Don Ross, who helps oversee $9.5 billion of assets as global strategist for Titanium Asset Management Corp. in Cleveland. “It’s just money changing hands and corporations being the net gainer by being able to issue cheaper and have better balance sheets. In the long run that will help the economy, but holy mackerel, at what cost?”
U.S. junk bonds yield 4.3 percentage points more than investment-grade debt, compared with 2.16 percentage points in June 2007 before the credit crisis, Bank of America Merrill Lynch index data show. Prices of the speculative-grade securities have climbed to 101.82 cents on the dollar from as low as 55 cents in December 2008, index data show. The bonds reached face value last month for the first time since June 2007.
Investors put $2.6 billion into distressed debt funds in the first half of the year, according to Hedge Fund Research Inc. in Chicago.
‘Very Nice Opportunities’
Money is pouring in as U.S. distressed bonds have returned 16.3 percent in 2010, following gains of 117 percent in all of 2009, according to Bank of America Merrill Lynch’s U.S. High- Yield Distressed Index. The entire market for high-yield bonds is up 13.7 percent.
“We are finding very nice opportunities in the secondary market,” said Marvin Barth, chief investment strategist at Tennenbaum Capital Partners LLC in Santa Monica, California. “We’re having a great opportunity to originate very nice deals for us that pay very high rates of return and also help these companies grow.”
Tennenbaum, which had been seeking about $1 billion to buy distressed debt, also lends directly to “middle-market” companies that don’t have as much access to capital markets, Barth said on Bloomberg Television’s “InBusiness.”
The percentage of distressed securities rose as high as 16.1 percent in May, climbing from a 22-month low in April of 9.2 percent, as concern that one of Europe’s most indebted nations might default led investors to flee the riskiest assets, Bank of America Merrill Lynch index data show.
Falling Default Rate
Moody’s forecasts the global corporate default rate will fall to 2.7 percent by year-end, dropping to 2 percent by the third quarter of 2011.
“Defaults have plunged,” said Patel, who manages Wells Fargo’s Advantage Diversified Capital Builder Fund and Advantage Diversified Income Builder Fund. “The credit markets have been extremely favorable. Some companies that have been borderline credit quality have been able to refinance.”
Moody’s said in an Oct. 4 report that it raised the speculative-grade liquidity ratings of eight companies in September compared with four cuts, the 17th month in a row in which upgrades outpaced downgrades.
‘Within Shouting Distance’
Investors are demanding an extra 606 basis points to own junk bonds rather than government debt, the lowest since May 5, five days before the European Union announced a $1 trillion bailout of its most indebted nations, according to Bank of America Merrill Lynch’s Global High-Yield Index. Absolute yields fell to 7.83 percent today from this year’s high of 9.62 percent on June 10.
High-yield spreads in the U.S., which fell today to 613 basis points, are “within shouting distance” of the historical average of 598 basis points, a milestone that doesn’t indicate the market has “run too far too fast,” Martin Fridson, global credit strategist at BNP Paribas Asset Management, said Oct. 6 in an e-mail.
The default rate implies a spread of 484 basis points, wrote Fridson, who is based in New York and began his career as a corporate debt trader in 1976.
“Investors are being well compensated for risk and talk of a bubble in high-yield bonds is misguided,” Fridson said.
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