Bloomberg News

Junk Bond Recoveries to Sink as Companies Shun Loans, S&P Says

June 22, 2011

June 22 (Bloomberg) -- Investors spurring record sales of junk bonds this year are accepting declining credit standards as expected recoveries plunge, Standard & Poor’s said.

Speculative-grade issues with a recovery rating of four have increased to 57 percent of the market in the year through May 15, compared to 11 percent in 2009, London-based analyst Taron Wade wrote in a report today. A rating of four indicates an expectation of 30-50 percent recovery in a default.

“Lower-rated credits and those under private-equity ownership can more easily access capital,” Wade said in the report. “It’s already leading to lower average recovery ratings on senior secured debt.”

Companies are increasingly shunning loans in favor of high- yield notes to fund acquisitions, Standard and Poor’s said, as they can borrow more with fewer restrictions. Private-equity firms can increase the amount they borrow for a buyout to 62 percent of the purchase price in a bond-financed deal, compared with half using loans, according to S&P LCD.

The average rating for junk bonds has dropped to 3.2 in 2011, compared with 2.8 for 2010 and 2.2 for 2009, S&P said. A level of three implies a 50-70 percent recovery, and two a 70-90 percent.

Investors in Europe bought 14.5 billion euros of junk bonds in the first quarter, an increase of 2 billion euros from the same period in 2010, S&P said. Issuance of 30 billion euros so far this year is on pace to surpass 2010’s record 41.5 billion euros of sales, data compiled by Bloomberg show.

Speculative, or junk-rated, bonds are rated below BBB- by S&P and Fitch Ratings and Baa3 by Moody’s Investors Service.

--with assistance from Ben Martin in London. Editor: Faris Khan, Cecile Gutscher

To contact the reporter on this story: Stephen Morris in London at smorris39@bloomberg.net.

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.


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