Bloomberg News

Junk Enters Distress as Yields Highest Since ’09: Credit Markets

October 12, 2011

Oct. 12 (Bloomberg) -- Yields on bonds from the neediest companies to the most creditworthy are soaring to levels last seen almost two years ago as a slowing global economy makes it harder for borrowers to meet debt payments.

Borrowing costs for companies from the U.S. to Europe to Asia expanded to 5.077 percent, the highest since November 2009, on Oct. 10, according to Bank of America Merrill Lynch index data. Global junk yields rose above 10 percent this month, the level considered distressed, for the first time since December 2009.

European Central Bank President Jean-Claude Trichet said yesterday that the sovereign crisis “has reached a systemic dimension” as political leaders race to recapitalize the region’s banks with Greece on the brink of default. In the U.S., earnings excluding financial companies are forecasted to grow the least since the end of 2009 as the economic recovery falters, reducing borrowers’ cushions to repay debt.

“Sovereign risk is poking its ugly head up in Europe over and over again,” said Rajeev Sharma, a money manager at First Investors Management Co. in New York, where he helps oversee $1.5 billion of investment-grade debt. “The exposure banks and a lot of firms have to Europe is definitely a cause of concern.”

GE Capital

The higher yields mean a borrower would have to pay an additional $912,000 in annual interest on $100 million of bonds compared with this year’s low of 4.165 percent on Aug. 4, Bank of America Merrill Lynch index data show.

The extra yield investors demand to hold investment-grade and junk-rated corporate bonds worldwide reached 370 basis points, or 3.7 percentage points, on Oct. 4, the highest since July 2009, according to the Bank of America Merrill Lynch Corporate & High Yield Index. Spreads have since declined to 352. High-risk, high-yield debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Elsewhere in credit markets, General Electric Co.’s finance unit and Time Warner Inc., owner of Warner Bros. film studio, are tapping the U.S. corporate bond market as confidence grows that European leaders may tame the region’s debt crisis.

GE Capital Corp., based in Stamford, Connecticut, plans to sell five- and 10-year notes and New York-based Time Warner is marketing bonds due in January 2022 and October 2041, according to people familiar with the offerings. Both sales may be benchmark in size, which typically means at least $500 million, said the people, who declined to be identified because terms aren’t set.

Default Swaps Fall

A benchmark gauge of U.S. corporate credit risk fell for a second day, reaching the lowest level in three weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 5.3 basis points to a mid-price of 129.3 basis points as of 11:47 a.m. in New York, according to index administrator Markit Group Ltd. That’s the lowest since Sept. 20.

The index typically falls as investor confidence improves and rises as it deteriorates. 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.

Yields on global investment-grade corporate bonds have climbed to 4.208 percent from 3.643 percent on July 31, while junk debt worldwide has expanded to 10.029 percent from 7.664 percent, Bank of America Merrill Lynch index data show. The yield on the overall index is 5.053 percent.

‘Sovereign Stress’

Bond yields are rising as the sovereign-debt crisis poses threats to the financial system. “Sovereign stress” has moved from Europe’s smaller economies to some of its larger countries, Trichet warned lawmakers in Brussels yesterday.

“The sell-off in credit products has principally been driven by uncertainty surrounding Europe,” said Adrian Miller, a New York-based fixed-income strategist at Miller Tabak Robert Securities LLC. “If they can actually put together a coordinated recapitalization, that will take a lot of the anxiety out of the market as it relates to bank liquidity.”

The International Monetary Fund cut its forecast for global growth last month. The world economy will expand 4 percent this year and next, the IMF said Sept. 20, compared with June forecasts of 4.3 percent in 2011 and of 4.5 percent in 2012. The U.S. growth projection for 2011 was lowered to 1.5 percent from 2.5 percent in June.

Chances of Recession

The chance of a U.S. recession has risen to 40 percent from about one third in August, according to JPMorgan economists. S&P 500 Index earnings, excluding financial companies, are forecast to have increased 14 percent for the third quarter, the smallest gain since the end of 2009, analysts’ estimates compiled by Bloomberg show.

Sales of junk bonds in the U.S. have stalled, with the debt declining 7.5 percent through yesterday from the end of July, Bank of America Merrill Lynch index data show. There were no high-yield offerings last week and issuance of the debt has fallen short of the 2011 average for 10 consecutive periods, Bloomberg data show.

“For most high-yield issuers the market remains firmly closed as it’s been far too volatile for them to attempt deals,” said Mark Olson, a high-yield desk strategist at Royal Bank of Scotland Plc in London.

The jobless rate and falling home prices are driving investors to dump riskier assets said Mirko Mikelic, a senior money manager at Fifth Third Asset Management, who helps oversee $13 billion of fixed-income assets in Grand Rapids, Michigan.

Unemployment in the U.S. has held at or above 9 percent every month except two since May 2009, including a reading of 9.1 percent in September, Labor Department data show. The S&P Case-Shiller index of home values in 20 U.S. cities decreased 4.1 percent in July from a year earlier.

Along with the European crisis, “these macro events are kind of like an anaconda slowly squeezing the market,” Mikelic said. “We see these kinds of stresses as slowly taking the oxygen away from these firms that need wholesale funding.”

--With assistance from Mary Childs, Kristen Haunss, Shannon D. Harrington, Susanne Walker, John Parry, Lisa Abramowicz and Cordell Eddings in New York, Jana Randow in Frankfurt, James G. Neuger in Brussels, Charles Penty and Emma Ross-Thomas in Madrid and Shelley Smith in Hong Kong. Editors: Alan Goldstein, Faris Khan

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Hannah Benjamin in London at hbenjamin1@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Paul Armstrong at parmstrong10@bloomberg.net


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