Sunday, January 11, 2009
Junk Bonds Jump to Good Start in '09 as Investors Add On Risk
By KATE HAYWOOD and ANDREW EDWARDS The value of new debt sold in the last month from two speculative, or junk-rated, companies has jumped as a result of pent-up demand from investors eager to add risk to their portfolios. The new debt from Cablevision Systems Corp. this past week and El Paso Corp. last month has been gobbled up as few investors have been willing to buy or sell existing junk debt that plummeted in value in last year's financial turmoil. Cablevision, which was able to increase the size of its offering to $750 million from the originally planned $500 million, sold its 8.5% senior notes due 2014 at 88.885 cents on the dollar. On Friday, they traded at 92 cents on the dollar, according to two junk-bond traders. The more-than-three-cent rise pushed down the yield, which moves inversely to the price, almost one percentage point to about 10.5%, according to the traders. The Cablevision deal was the largest sale of junk bonds since October. El Paso sold $500 million of 12% notes due 2013 at a price of 88.9 to yield 15.25% on Dec. 9. The debt has since rallied to trade around 105 cents, offering a 10.7% yield, according to traders. The junk-bond market is in far better shape than it was a few months ago. "People are not in the panic mode that we saw a couple of months ago, and on top of that, we have had three to four weeks of money coming into funds," said Chris Munck, who is on the high-yield trading desk at B. Riley & Co. U.S. high-yield bond funds have had their strongest start to a year since 2003, reporting a net $988 million inflow in the week ended Jan. 7, said AMG Data Services. That is the strongest first-week inflow in six years and the biggest single-week inflow since the week ended Sept. 5, 2003. This has seen risk premiums, or spreads over risk-free Treasurys for high-yield bonds, fall to 16.67 percentage points Thursday, according to the Merrill Lynch Master II High Yield Index. That is still historically high but well below the peak of mid-December, when they hit 21.82 percentage points. The performance of newly issued debt, however, may not be sufficient to jump-start the stalled secondary market for junk bonds, where these securities trade, as investors continue to be reluctant to book losses on assets that lost so much of their value in last year's turmoil. Prices on existing junk bonds were, an average, down about a third in 2008, according to Standard & Poor's Leveraged Commentary & Data, with only bits and pieces of it actually trading. "You look at a lot of quotes, but you could not buy real bonds," said Margie Patel, portfolio manager at Evergreen Investments.