Thursday, August 21, 2008

corporate bonds markets pain rivals march 08

Spreads are still gapping, exceeding the level in March 08. Junk-Bonds spreads rose over the level in 2002. Financial institutions are bogged down on concerns about their ability to raise funds under prolonged credit crunch, weakening economy, and slumping home prices. A string of bonds sales also hamper the market....

The credit markets are treacherous ground for financial institutions, and their recent struggles raising money are dragging down the corporate bond markets.

In recent days, price declines among investment-grade bonds have pushed their spreads -- the gap between their yields and those of ultrasafe Treasury securities -- to a multidecade high, according to Merrill Lynch data. These bonds now yield 3.11 percentage points more than Treasurys on average, exceeding their recent March peak at 3.05 points.

That erases the improvement that took place from April to June, after investors were heartened that Bear Stearns's problems didn't topple the financial system.

Junk-bond spreads are also growing, but at 8.3 percentage points, the gap over risk-free Treasurys remains below March's high of 8.6 points. The current junk spread is still well under multidecade highs at 11 percentage points hit November 2002 -- the bottom of the tech-driven downturn that included large bankruptcies such as Enron and WorldCom.

The investment-grade bonds of banks, brokerage firms and other financial companies have suffered the most pronounced decline. Spreads on their debt have reached new highs as well, at 3.78 percentage points over Treasury bonds, significantly higher than the 3.62 point peak in March.

Investors and analysts are concerned about the ability of financial institutions to withstand the now yearlong pressures on their balance sheets from illiquid assets and deteriorating loans, a weakening economy and a mountain of debt coming due in coming quarters. Fears about the future of housing-finance companies Fannie Mae and Freddie Mac are also weighing on the market for corporate debt.

"I don't have an appetite for financial institution debt at all," says Tom Atteberry, partner at First Pacific Advisors LLC. "They are still early in the process of deleveraging," he adds, referring to financial institutions' raising capital and cutting back on borrowed funds in the wake of massive write-downs and losses.

Some financial institutions are selling their best assets to raise funds, a sign they have few options left for raising capital, says Mr. Atteberry. For example, Merrill Lynch & Co. recently sold its stake in Bloomberg LP, and Lehman Brothers Holdings Inc. is shopping pieces of its investment-management business, including parts of Neuberger Berman.

Indeed, one catalyst behind the recent decline in investment-grade corporate bonds, and financial-company debt in particular, was a string of bond sales last week by Citigroup Inc., American International Group and American Express Credit Corp. To sell a combined $8.25 billion in debt, all three companies had to pay investors significantly higher yields than what the firms had hoped. They paid 0.75 of a percentage point to one full point more than recent similar offerings by these companies, according to Thomson Reuters.

Most of those bonds didn't do well in secondary market trading. It surprised many investors, who worried that the trend might indicate deeper problems among the financials. Bankers say several financial firms postponed their near-term debt offerings until the fall after seeing the weak performance of last week's deals.

Financial institutions can't put off their fund raising forever. They have $660 billion of U.S. dollar-denominated long-term corporate bonds coming due in the next 12 months, the highest volume ever for such a period of time, according to J.P. Morgan Chase & Co. research.

"The market this August is as thin as we've ever seen it, and borrowers have had to pay very significant premiums to get investor focus," said Therese Esperdy, head of global debt capital markets at J.P. Morgan, adding that there's been a bit of a "downward spiral in valuations."

Investment-grade corporate bond issuance has also slowed with the market malaise this summer. After hitting a record level for corporate bond deals in May at $141 billion, June, July and August combined have seen only $106 billion in new investment-grade offerings, according to Thomson Reuters. Thus far this month, just $25 billion of such bonds have been slated for sale, a weak total even for the traditionally slow month of August.

1 comment:

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