Tag Archives: Junk bonds

Sudden Death? Junk-Rated Companies Headed for Biggest “Refinancing Cliff” Ever: Moody’s, by Wolf Richter

From Wolf Richter at wolfstreet.com:

At the worst possible time.

Most of the defaults, debt restructurings, and bankruptcies so far this year and last year were triggered when over-indebted cash-flow negative companies could not make interest payments on their debts.

During the crazy days of the peak of the credit bubble two years ago, they would have been able to borrow even more money at 8% or 9% and go on as if nothing happened. But those days are gone. Now the riskiest companies face interest costs of 20% or higher – if they’re able to get new money at all. Hence, the wave of debt restructurings and bankruptcies.

But that’s small fry. Now comes the wave of companies whose debts mature. They will have to borrow new money not only to fund their interest payments, cash-flow-negative operations, and capital expenditures, but also to pay off maturing debt.

That “refinancing cliff” is going to be the biggest, steepest ever, after the greatest credit bubble in US history when companies took on record amounts of debt, and it comes at the worst possible time, warned Moody’s in its annual report.

In its report a year ago, Moody’s had already warned that the refinancing cliff for junk-rated US companies over the next five years – at the time, from 2015 through 2019 – would hit $791 billion. Of that, $349 billion would mature in 2019, the largest amount ever to mature in a single year.

But Moody’s pointed out that “near term risk remains low as only $18 billion, or 2% of total speculative-grade issuance comes due in 2015.” And that’s how it played out last year.

Since then, the refinancing cliff has gotten a lot bigger, according to Moody’s new annual report. The amount in junk-rated debt to be refinanced over the next five years, from 2016 through 2020, has surged nearly 20% to a record of $947 billion.

This is an increasingly steep cliff, with the largest portions due in the later years of the period, including $400 billion to mature in 2020, the highest amount of rated debt ever to mature in one year.

And near term? Moody’s Senior Analyst Tiina Siilaberg warned that there would be “a significant wave of new issuance in late 2016 and 2017.” At the worst possible time – because “a range of macroeconomic factors will make it more difficult for lower-rated companies to tap the debt capital markets in order to refinance their debt obligations.”

One of those macroeconomic factors is the spread between yields of these lower-rated junk bonds and Treasuries, which has totally blown out. For debt rated CCC/Caa1 or lower, the average spread has shot to over 20%, where it had been on October 6, 2008, right after the post-Lehman panic. And yields for these bonds have soared to over 21% on average.

To continue reading: Sudden Death? Junk-Rated Companies Headed for Biggest “Refinancing Cliff” Ever: Moody’s

This is Why Junk Bonds Will Sink Stocks: Moody’s, by Wolf Richter

From Wolf Richter at wolfstreet.com:

“Some very critical things are hidden.”

After the white-knuckle sell-off of global equities that was finally punctuated by a rally late last week, everyone wants to know: Was this the bottom for stocks? And now Moody’s weighs in with an unwelcome warning.

If you want to know where equities are going, look at junk bonds, it says. Specifically, look at the spread in yield between junk bonds and Treasuries. That spread has been widening sharply. And look at the Expected Default Frequency (EDF), a measure of the probability that a company will default over the next 12 months. It has been soaring.

They do that when big problems are festering: The Financial Crisis was already in full swing before the yield spread and the EDF reached today’s levels!

And so, John Lonski, chief economist at Moody’s Capital Markets Research, has a dose of reality for stock-market bottom fishers:

For now, it’s hard to imagine why the equity market will steady if the US high-yield bond spread remains wider than 800 basis points [8 percentage points]. Taken together, the highest average EDF metric of US/Canadian non-investment-grade companies of the current recovery and its steepest three-month upturn since March 2009 favor an onerous high-yield bond spread of roughly 850 basis points.

Moody’s EDF began spiking last summer and has nearly doubled since then to 8%, the highest since 2009.

The average spread between high-yield bonds and Treasuries has widened to 813 basis points (8.13 percentage points). But at the lower end of the junk-bond spectrum (rated CCC and below), the yield spread is a red-hot 18.4 percentage points.

To continue reading: This is Why Junk Bonds Will Sink Stocks: Moody’s


Junk-Bond Risk Gauge Jumps as China Meltdown Adds to Energy Rout, by Sridhar Natarajhan and Michelle Davis

From Sridhar Natarajan and Michelle Davis at blomberg.com:

Premium on high-yield debt approaching most in three years

The goal is to `avoid land mines’ with oil at 12-year low

Junk-bond investors coming off their first losing year since 2008 are in the crosshairs again, as a stock-market meltdown in China and a plunge in oil prices cloud the outlook for debt sold by the least credit-worthy companies.

The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, surged as much as 21 basis points to 516 basis points, rising toward the highest mark in three years. The average borrowing costs for the riskiest portion of the high-yield market surged to 18.4 percent, Bank of America Merrill Lynch index data show, a level not seen since 2009.

“The whole world’s interrelated and you can’t get around that,” said Andrew Brenner, head of international fixed income for National Alliance Capital Markets in New York. “High-yield’s going to be under pressure just because oil’s under pressure. And you’re having this whole risk-off situation.”

The price of crude has plunged 10 percent this week and touched its lowest level since 2009, pushing the relative yield on energy-company debt to more than 13.5 percentage points, Bloomberg indexes show. The industry, which is clocking its worst performance on record, makes up about 15 percent of the junk-bond gauge.

‘Pointing Negative’

“With commodities, there are 10 things that can go right or wrong, and right now almost all of them are pointing negative,” said John McClain, a portfolio manager at Diamond Hill Capital Management Inc., in Columbus, Ohio, which oversees about $17 billion. “You want to avoid land mines in this market. You don’t want to be a hero. It’s not a time to reach.”

The People’s Bank of China cut the yuan’s reference rate against the dollar by 0.5 percent on Thursday, the biggest since Aug. 13, two days after a surprise devaluation. The Shanghai Composite Index tumbled 7.3 percent before trading was halted by new circuit-breakers that some criticized for exacerbating declines.

Later, the nation’s regulator said it was suspending the circuit-breakers.
China’s central bank further spooked the market when it announced that foreign-exchange reserves posted the first annual drop since 1992, spurring concern that capital flight from the world’s second-largest economy is accelerating.

To continue reading: Junk-Bond Risk Gauge Jumps 

Dislocation Watch: Getting Run Over on Third Avenue, by Pater Tenebrarum

This is a good article that amplifies some of the points made in Crisis Progress Report (14): Global Margin Call. From Pater Tenebrarum at davidstockmanscontracorner.com:

It has become clear now that the troubles in the oil patch and the junk bond market are beginning to spread beyond their source – just as we have always argued would eventually happen. Readers are probably aware that today was an abysmal day for “risk assets”. A variety of triggers can be discerned for this: the Chinese yuan fell to a new low for the move; the Fed’s planned rate hike is just days away; the selling in junk bonds has begun to become “disorderly”.

Recently we said that JNK [a junk bond ETF] looked like it may be close to a short term low (we essentially thought it might bounce for a few days or weeks before resuming its downtrend). We were obviously wrong. Instead it was close to what is beginning to look like some sort of mini crash wave:

To be sure, such a big move lower on vastly expanding volume after what has already been an extended decline often does manage to establish a short to medium term low. There are however exceptions to this “rule” – namely when something important breaks in the system and a sudden general rush toward liquidity begins.

As we have often stressed, we see the corporate bond market, and especially its junk component, as the major Achilles heel of the echo bubble. One of its characteristics is that there are many instruments, such as ETFs and assorted bond funds, the prices of which are keying off these bonds and which are at least superficially far more liquid than their underlying assets. This has created the potential for a huge dislocation.

We would also like to remind readers that it is not relevant that the main source of the problems in the high yield market is “just” the oil patch. In 2006-2007 it was “just” the sub-prime sector of the mortgage market. In 2000 it was “just” the technology sector. Malinvestment during a boom is always concentrated in certain sectors (in the recent echo boom the situation has been more diffuse than it was during the real estate bubble, but the oil patch is certainly one of the most important focal points of malinvestment and unsound credit in the current bubble era).

To continue reading: Dislocation Watch: Getting Run Over on Third Avenue

It Starts: Junk-Bond Fund Implodes, Investors Stuck, by Wolf Richter

From Wolf Richter at wolfstreet.com:

And the next crisis hasn’t even begun yet.

We have warned about “open-end” bond mutual funds, particularly those with a lot of high-yield bonds. We know some folks who got burned when Charles Schwab’s $13-billion bond fund SWYSX blew up during the financial crisis and lost 60% or so of its value before its data went offline.

Schwab settled all kinds of class-action and individual lawsuits for cents on the dollar. It got in trouble over other bond funds. And other purveyors of bond funds got in trouble too.

It works like this: When an “open-end” bond fund starts losing money, investors begin to sell it. Fund managers first use all available cash to pay investors. When the cash is gone, they sell the most liquid securities that haven’t lost much money yet, such as Treasuries. When they’re gone, they sell the most liquid corporate paper. As they go down the line, they sell bonds that have already lost a lot of value. By now the smart money is betting against the fund, having figured out what’s happening. They’re shorting the very bonds these folks are trying to sell.

The longer this goes on, the more money investors lose and the more spooked they get. It turns into a run. And people who still have that fund in their retirement account are getting cleaned out.

Bond funds can be treacherous – especially if they hold dubious paper, which is never dubious until it suddenly is. And when they get in trouble, you want to be among the first out the door. Here’s one of our more recent warnings on open-end bond funds, May 20 this year: Are These Ticking Time Bombs In Your Portfolio?

The $1.8-trillion or so of US junk bonds are everywhere. Investors loved them because they have discernible yields in the Fed-designed zero-interest-rate environment. Junk bonds were hot, and so were the funds. People went for them, with no idea that they were putting their nest egg in a fund larded with explosives.

A significant part of Corporate America is junk rated, well-known names like Chrysler, Valeant Pharmaceuticals, or iHart Communications, yup, the LBO wunderkind owned by private equity firms and weighed down by $8.9 billion in debt that is now “distressed.”

They issue debt because they’re cash-flow negative and need new money, or because they gorge on M&A, or have to fund share-buybacks and special billion-dollar dividends back to the private equity firms that own them. During the boom years of the credit bubble, nothing could go wrong. And now, as ever more junk bonds wither, crash, default, and cause their owners to tear out their hair – just then, a bond fund implodes.

To continue reading: Junk-Bond Fund Implodes, Investors Stuck

2007 Redux: Stock Market Parties——Even As Junk Debt Sounds The Alarm, by Pater Tenebrarum

From Pater Tenebrarum at davidstockmanscontracorner.com:

While the Stock Market is Partying …

There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007.

At first it was assumed that the most highly rated tranches of complex structured products would be immune, as the riskier equity tranches would serve as a sufficient buffer for credit losses. When that turned out to be wishful thinking, it was argued that the problem would remain “well contained” anyway. After all, sub-prime only represented a small part of the overall mortgage credit market. It could not possibly affect the entire market. This is precisely the attitude in evidence with respect to corporate debt at the moment.

A weekly chart of high yield ETF HYG (unadjusted price only chart)

The argument as far as we’re aware goes something like this: there are only problems with high yield debt in the energy and commodity sectors. This cannot possibly affect the entire corporate credit market. We should perhaps point out that in spite of this sectoral concentration, problems have recently begun to emerge in other industries as well (a list of recent victims can be found at Wolfstreet).

The argument also ignores the interconnectedness of the credit markets. Once investors begin to lose sufficiently large amounts of money in one sector, the more exposed ones among them (i.e., those using leverage, a practice that gains in popularity the lower yields go, as otherwise no decent returns can be achieved), will start selling what they can, regardless of its relative merits. This will in turn eventually make refinancing conditions more difficult for all sorts of industries.

It also overlooks that energy and commodities-related debt is simply huge and the losses are really beginning to pile up by now. The junk bond market has grown by leaps and bounds during the echo bubble, so a lot of money has become trapped in it. Many low-rated borrowers need to continually refinance their debt, otherwise they will simply fold. Once liquidity for refinancing dries up – and this is what growing losses in a big market segment will inexorably lead to – it will be game over.

To continue reading: Junk Debt Sounds The Alarm

Bloodletting 8 Trading Days in a Row: Junk Bonds Go to Heck, by Wolf Richter

From Wolf Richter at wolfstreet.com:

“Large amounts of potential and realized losses”: Moody’s

The US junk-bond market, after years of record-breaking issuance, has nearly doubled to $1.8 trillion since late 2008, one of the miracles the Fed’s QE and ZIRP performed. Those were the good times. Now Fed-blinded investors are cracking open their eyes.

It didn’t help that the week was punctuated by some juicy bankruptcies, including steelmaker Essar Steel Algoma, which filed in the US and Canada – for the second time in two years and for the third in 25 years – as it struggles with over $1 billion in debt. And Millennium Health, a malodorous mess I wrote about in July [“Leveraged Loan” Time Bomb Goes Off, JP Morgan Did It].

Energy junk bonds are sinking deeper into the mire. For example, natural-gas driller Chesapeake Energy’s 6.625% notes due in 2020 fell 7 points last week to 58 cents on the dollar. Or the misbegotten Occidental Petroleum spin-off California Resources; according to S&P Capital IQ LCD, its 6.00% notes due 2024 dropped to 64.50 cents on the dollar.

Beyond energy, specialty chemicals maker Hexion’s 6.625% notes due 2020 fell to about 81 cents on the dollar. And Mallinckrodt Pharmaceuticals, based in Ireland, with its US headquarters in St. Louis, Missouri, got hit by a tweet from short-seller Citron Research, after it took a break from eviscerating Valeant. As Mallinckrodt’s shares plunged, its 5.625% notes due 2023 dropped from 94 before the tweet into “price discovery,” with quotes around 85.

When tire-maker Titan International reported sharply declining revenues, its 6.875% secured notes due 2020 fell three points to 82.25. Scientific Games, which caters to lottery and gambling organizations, also reported crummy quarterly results; its 10% notes due 2022 plunged six points early in the week, to about 81.

Then there was Men’s Wearhouse whose blood-soaked investors are ruing the day it acquired Jos. A. Bank. Its shares have been getting hammered relentlessly since Friday a week ago, and its bonds are now down to 85 cents on the dollar.

Sprint’s 7.88% notes due 2023 plunged over 5 points to 84.50 cents on the dollar. Satellite communications company Intelsat Jackson, the US subsidiary of Luxembourg-based Intelsat, is edging closer to the brink, with its 7.75% notes due 2021 dropping nearly 5 points to 53 cents on the dollar.

You get the idea. S&P Capital IQ in its LCD HY Weekly described the junk-bond debacle this way:

Bad news amid low-volume, jittery market conditions led to some big downside movers again this week. Broad momentum was also negative amid signs of retail cash outflows from the asset class and higher underlying US Treasury rates after the blow-out November jobs data skewered bonds.

To continue reading: Junk Bonds Go To Heck

Last Two Times this Happened, it was Mayhem, by Wolf Richter

Today’s theme: The global economy is going to hell in a handbasket. This week’s stock market action made October’s glorious rally a distant memory (see “Crisis Progress Report (13): Time for the Crash,” SLL, 11/8/15). It may be awhile before we see a substantial rally, and rom much lower levels. It’s been like a light switch going on (or, more aptly, off). Nothwithstanding oodles of central bank fiat debt creation, interest rate suppression, and financial asset purchases, the real world, tangible economy is deteriorating alarmingly. From Wolf Richter at wolfstreet.com:

Moody’s Warns about Credit Crunch, Unnerves with Parallels to 2008!

The US bond market has swollen to $40 trillion. Over $8 trillion are corporate bonds, up a mind-boggling 50% from when the Fed unleashed its zero-interest-rate policy and QE seven years ago.

So far this year, $1.34 trillion in new corporate bonds have been issued, up 6.8% from last year at this time, which had already been a record year, according to the Securities Industry and Financial Markets Association (SIFMA). Bond issuance in 2012, 2013, and 2014 set ever crazier records; 2015 is on track to set an even crazier one: close to $1.5 trillion.

That’s a lot of newly borrowed moolah. Much of it is being used to pay for dividends, stock buybacks, M&A, and other worthy financial engineering projects designed to inflate stock prices, though that strategy has turned into a sorry dud this year.

Junk bonds now make up $1.8 trillion of this pile of corporate debt, nearly double the $944 billion in junk bonds outstanding at the end of 2008 before the Fed saved the economy, so to speak.

But what happens when this flood of cheaply borrowed money begins to dry up as an ever larger percentage of that $1.8 trillion in junk bonds begins to default, while ever more high-grade bonds get downgraded to junk?

That’s the end of the credit cycle – and the beginning of financial nightmares. It’s the phase the bond market has already entered, according to a report by John Lonski, Chief Economist at Moody’s Capital Markets Research.

One metric that marks turning points in the credit cycle is the credit upgrade ratio. In Q2 this year, the ratio of ratings upgrades to total ratings revisions for junk bonds was still 49%. By Q3, this upgrade ratio had fallen to 39%, the worst level since Q2 2009 when it was 30%. Halfway into Q4, there have been 18 upgrades and 57 downgrades, a ratio of 24%, the worst since Q1 2009.

Among investment-grade bonds, the ratio is even more terrible: 1 upgrade and 11 downgrades. “A convincing negative trend may be emerging,” the report said gingerly.

To continue reading: Last Two Time this Happened, it was Mayhem

Watch for Junk-Bond Air Pockets as Sprint Spirals Downward, by Lisa Abramowicz

SLL has said that the debt contraction and asset price plunges that started in the natural resources sector last year were the beginning of a debt contraction that would eventually engulf the entire economy. As prediction, that “localized” debt contraction is starting to ripple outward. From Lisa Abramowicz at bloomberg.com:

Sprint Corp. is a cautionary tale for investors who think they’re immune to carnage in the $1.3 trillion junk-bond market as long as they steer clear of energy debt.

Moody’s Investors Service on Tuesday downgraded the wireless company, which has more than $30 billion of debt outstanding, as it struggles to compete with better capitalized competitors such as AT&T Inc. and T-Mobile USA. Much of the company’s debt was downgraded several steps to Caa1, which is considered close to default.

The market response was fierce. Sprint’s $2.5 billion of bonds maturing in 2028 plunged as low as 80.8 cents on the dollar from 88.4 cents on Monday. Its $4.2 billion of notes maturing in 2023 fell as low as 90.1 cents from 98.6 cents two days earlier.

Many big high-yield bond-fund managers, including Pacific Investment Management Co., Franklin Advisors Inc. and BlackRock Inc., hold Sprint debt. It’s one of the most frequently traded names in the junk-bond universe. The company’s challenges are no surprise, of course. It’s why it has a speculative-grade rating in the first place.

But some investors were clearly caught off guard by Moody’s action, which put some of the company’s bonds in the lowest-ranked bucket. Some funds have a limit on how much of the junkiest junk they’ll hold, and they will sell if too much of their holdings are downgraded to that level.

This just shows that even the most highly traded, popular names can be vulnerable to sudden plunges that leave millions of dollars of losses in their wake.

Sprint is hardly the last one to experience such an air pocket in its value. On Tuesday, the company’s unfortunate plight apparently dragged down debt of Frontier Communications Corp., with investors reducing their exposure generally to telecommunications-related debt.

Debt of energy, coal and metals companies have been the hardest hit in the past year in tandem with falling commodity prices. Investors have largely responded by simply steering clear of those particular companies and piling into high-yield debt that’s less exposed to falling crude and steel values.

But that clock is running out on that model. Companies in other industries, such as retail, are also running into trouble, and that will only become more common as this credit cycle ages.

To continue reading: Watch for Junk-Bond Air Pockets

Add Junk Bonds To The Growing Pile Of Concerns, by Dana Lyons

From Dana Lyons, via zerohedge.com:

This week’s Charts Of The Day and blog posts have had a heavy bearish bent to them. That isn’t by design. We just go where the data leads us and much of the data, in our view, is skewing to the bearish side for equities. Included in the concerning assortment of data are many examples of weakening stock market internals. That isn’t the only concern, however. As today’s Chart Of The Day illustrates, you can also add high yield, i.e., “junk”, bonds to the growing list. Junk bonds, as the name implies, represent the lesser credit-worthy entities in the space. Thus, they carry a higher yield that higher-grade bonds.

Because of their credit issues, these bonds often trade more closely with equities than they do with base interest rates. Occasionally, however, junk bonds and stocks will diverge with one another. Such a divergence is occurring at the moment. It is often suggested that when the bond and stock markets diverge, the bonds typically prove to be correct, i.e., the stock market usually ends up going the way of the bonds. Is there evidence to back that up? According to our research there is, at least following conditions similar to those at the present time. And, for stock bulls, that isn’t necessarily good news.

What are the conditions? Well, despite the tendency to move together, junk bonds are currently near recent lows while stocks remain near their highs. Specifically, junk bond rates (which move in the opposite direction as prices) closed at a 6-month high yesterday, as measured by the BofA Merrill Lynch US High Yield Master II Effective Yield. At the same time, as of yesterday the S&P 500 was within 1% of its 52-week high. This set of conditions has only been seen on 21 previous days going back to 1997.

To continue reading: Junk Bonds