Tuesday, January 29, 2008
Junk Bond Spreads are Widening - signaling the verge of recession
--Junk bonds are off to their worst start since 1990, falling1.8 percent and triggering $17 billion in losses this month,according to index data compiled by New York-based Merrill Lynch& Co. Yields relative to Treasuries are rising at the fastestpace in at least 11 years as prices drop. --The pain may only get worse. Speculative-grade borrowersmade up the majority of U.S. corporate debtors for the first timelast year, according to Standard & Poor's. The default rate will soar to more than 8 percent this year, the highest since EnronCorp.'s collapse rippled through the market in 2002, estimatesZurich-based UBS AG. Yields show retailers, homebuilders and mortgage companies are among companies at the greatest risk as banks rein in lending. --This month they've dropped an average 2 cents on the dollar.An additional 7 cents would create losses of about $50 billion,based on the $709 billion of debt in Merrill's high-yield index. --In a recession, the extra yield investors demand to own junkbonds instead of Treasuries would widen to an average of morethan 10 percentage points from about 7 percentage points, saidParks, who wouldn't disclose what he was buying or selling. Thespread was a record low of 2.41 percentage points in June. --The December 2001 failure of Houston-based energy traderEnron was the biggest bankruptcy to date. It sparked an 11.2 percent annualized default rate the following month, according toNew York-based Moody's. Spreads reached 11.2 percentage points inOctober 2002, the highest since at least 1996. --Losses of as much as $400 billion on securities linked tosubprime loans may curtail lending by $2 trillion in the nextcouple of years, Jan Hatzius, chief U.S. economist in New York atGoldman Sachs Group Inc., said in a Nov. 16 report. --Junk ratings were assigned to 51 percent of U.S. corporate borrowers, New York-based S&P said in November. They accounted for 28 percent in 1992. The amount of distressed debt -- bonds that yield more than 10 percentage points above Treasuries --has swelled to $59.3 billion, the most since 2003, Merrill data show. --There are 147 issuers with bonds trading at distressedlevels, including Minneapolis-based mortgage lender ResidentialCapital LLC, whose $16.6 billion of debt was cut to belowinvestment grade last year, and Bon-Ton Stores Inc., the York,Pennsylvania, retailer that had losses in six of the past sevenquarters. In November, there were about 60, Bloomberg data show. --At least three high-yield companies have filed forbankruptcy this month. Montreal-based Quebecor World Inc., thesecond-largest publicly traded printer in North America, andEagan, Minnesota-based Buffets Holdings Inc., the biggest U.S.operator of buffet-style restaurants, sought protection fromcreditors last week. Hollywood, Florida-based homebuilder TousaInc. filed for bankruptcy today.