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Tuesday, January 19, 2010

IJIOT Investors Find More Risk in Junk Bonds: Making 2010 Year of the Default?

*Companies have also been cutoff from bank credit lines so they are issuing corporate bonds at alarming rates. They are using the money to pay off cheaper debt and taking on higher interest debt hoping that the economy will recover before they are caught with their pants down. Gee, looks like the 80's all over again to me and the federal government is at the head of the line. The only difference is that the government bonds are artificially low due to all the money pumping from Helicopter Ben so we don't have to worry about a gov default. But corporate debt is a whole other ball of junk yard dog. Bondholders will lose their shorts and crash this market again you wait and see. I have been saying for well over a year to expect 2010 to be the year of default for companies. At least us consumers have company now in the Titanic cargo hold and are no longer alone.
Yield Junkies Return to Bond Market
Risk Takes a Back Seat as Demand for High-Yield Credit Sets a Record; Forgetting 2008Happened
In the high-yield credit markets, it is time to party like it's 2006.
Companies left for dead a year ago are now finding that investors are clamoring for their high-yield debt. Private equity-backed businesses are paying their owners dividends out of new bond issues. In all, companies raised $11.7 billion last week in the high-yield bond market, the biggest in history, according to Thomson Reuters.
The previous record: $11.4 billion, set at the apex of the mid-decade credit boom in November 2006.
The latest demand seems all the more remarkable coming just over a year after the greatest financial panic in generations. The panic and a bleak economy helped pushed 11% of high-yield issuers into default in 2009, according to Standard & Poors.
Such sobering figures appear to be overlooked by investors. "It looks like risk is on the backburner again as investors are reaching for yield," said Adam Cohen, co-founder of Covenant Review, an independent credit research firm. "And issuers are all too happy to oblige in meeting the insatiable demand."
For most issuers, the new debt isn't going toward building new factories or funding big acquisitions. Instead, these new deals are improving the companies' balance sheets by repaying existing debt and pushing back maturities. These overleveraged companies hope they can get more time to improve operations and benefit from an economic recovery.
In March 2009, Hexion Specialty Chemicals Inc. said it planned to cut about 15% of its work force after posting a $921 million loss. That came after Standard & Poor's lowered its ratings on the Apollo Global Management LP-owned company, citing a risk that it would violate the covenant on its credit facilities.
On Thursday it sold $1 billion in high-yield bonds paying investors 9% interest. Investor demand was so large the company raised $300 million more than it had targeted.
Energy Future Holdings Corp., the Texas utility acquired by private-equity firms Kohlberg Kravis Roberts & Co. and TPG in 2007, sold $500 million of bonds earlier this month. The move followed a disappointing debt exchange in November in which the company sought to reduce its $44 billion debt load. The company has struggled amid the recession and a sharp drop in natural gas prices. (

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