Junk-Bond Market Has Closed the Door

U.S. companies were locked out of the junk-bond market in November, putting half of American corporations at risk of being unable to raise cash. The current environment is causing market participants to harken back to 1991, when the collapse of Drexel Burnham Lambert sent the junk, or high-yield, bond market into a tailspin. About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies. The shutdown already has sent U.S. car makers, desperate for cash, to Washington for emergency loans. The only dollar-denominated debt deal done in November was a $9.72 million bond from Peruvian power and utility company Edegel SA, according to data provider Dealogic. Only one U.S. company -- MGM Mirage, with its $700 million deal last month -- has been able to raise debt in the junk-bond market since the end of September, according to Dealogic. Yields of 20% or more make it too expensive for borrowers. That is about triple the 7% yield threshold that used to define the term junk bond. Investors in junk bonds, meanwhile, were hammered with 8.8% losses in November for year-to-date declines of 32%, according to Merrill Lynch's high-yield index as of Nov. 27. That isn't great news for companies needing cash, and may force them to scramble to find it elsewhere. Natural-gas producer Chesapeake Energy Corp. announced Wednesday that it planned to sell up to $1.8 billion in stock, indicating the company "may need the cash now," said energy investment bank Tudor Pickering. "It's not optimal conditions for companies to go into the market right now," said Martin Fridson, chief executive officer of Fridson Advisors, an investment firm in New York. "There are no deals getting done, which shows there is no capital available at prices which are appealing to issuers," he said. October and November were the slowest two months for U.S. junk-bond issuance in more than 13 years, according to Dealogic. At zero, new-issue volume this month compares with the $784.7 million seen in January 1995, when four deals priced, the previous lowest level before October this year, according to Dealogic, which began tracking such statistics in 1995. Conditions in the leveraged-loan market aren't much better. November is shaping up to be the slowest month since January 1999, according to Dealogic. Leveraged loans typically are secured with assets, but, like junk bonds, are made to companies with risky credit ratings. In November, only $16.9 billion of leveraged loans have been sold. That is well below $77.4 billion for the same period in 2007 and only a shade more than in January 1999, when $16.6 billion was put together, Dealogic data show. The prospects for 2009 look ominous as well. "Economic challenges, deteriorating fundamentals and access to capital concerns are expected to continue weighing on the bonds and credit default swaps of issuers," analysts at Société Générale SA said in a note to clients. Ratings company Moody's Investors Service has predicted a default rate of 11.2% by the end of October 2009 for high-yield bonds, as financing conditions continue to deteriorate for many companies. Other expectations, however, are more pessimistic. In October, Garman Research called for a record default rate of 18.3% within the next year.