Junk Spreads Rise at Fastest Pace Since May ‘10: Credit Markets

By John Glover and Zeke Faux
June 21 (Bloomberg) -- Relative yields on junk bonds are rising at the fastest pace since the start of Europe’s sovereign debt crisis in May 2010 on rising concern that Greece’s debt burden will further roil Europe and depress the global economy.
The extra yield investors demand to own speculative grade corporate debentures instead of government debt has risen 56 basis points this month to 568 basis points on average, Bank of America Merrill Lynch’s Global High Yield Index shows. That’s the most since the spread widened by 142 last May.
Sales of high-yield, high-risk bonds in the U.S. this month are the least since July as wider spreads translate into an extra $568,000 in interest on every $100 million borrowed, according to data compiled by Bloomberg. Investors are backing away from all but the safest government bonds after the International Monetary Fund in Washington cut its forecast last week for growth in the U.S. economy, the world’s largest.
“There is a huge amount of fear at the moment that the Greece situation will metamorphose into something more significant,” said Timothy Barker, head of credit research at Societe Generale SA in London.
Junk bonds have lost 1.44 percent in June through last week, including reinvested interest, putting them on track for their first losing month since tumbling 1.72 percent in November. The securities are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

Clear Channel

The selloff has been broad, with bonds from all but four of the 50 biggest issuers in the Bank of America Merrill Lynch global high-yield index posting losses this month.
Clear Channel Communications Inc., which is the parent of the world’s biggest billboard owner and has $20 billion of debt, is heaping the biggest losses on investors among the 50 biggest issuers in the index with an average decline of 5.57 percent.
Debt of casino owner Caesars Entertainment Corp., taken private for $30.7 billion in January 2008 by Leon Black’s Apollo Global Management LLC and TPG Capital, lost 4.06 percent.
Elsewhere in credit markets, Danaher Corp. sold $1.8 billion of bonds in its first debt offering in more than two years to help fund its purchase of Beckman Coulter Inc. Morgan Stanley is seeking to raise a $688 million collateralized loan obligation to be managed by GSO Capital Partners LP. Prices on leveraged loans fell for a 14th straight day, reaching the lowest level in more than five months.
The extra yield that investors demand to own corporate versus government debt from the U.S. to Europe and Asia rose 1 basis point to 165 basis points yesterday, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.
Yields rose 1 basis points to 3.76 percent, the data show.

Citigroup

Bonds from New York-based Citigroup Inc. were the most actively traded investment-grade U.S. corporate securities by dealers, with 66 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
In Europe, the cost of insuring Greek debt fell on speculation Prime Minister George Papandreou will win a confidence vote tonight, paving the way for new austerity measures and additional bailout funds. Credit-default swaps linked to the nation’s bonds dropped 60 basis points to 1,942 basis points, according to CMA.
That helped drive the Markit iTraxx SovX Western Europe Index of swaps linked to 15 governments 12 basis points lower to
211 basis points, according to Markit Group Ltd.

Corporate Risk

The cost of insuring corporate debt also fell. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 2 basis points to 109.25 basis points, according to JPMorgan Chase & Co. at 10 a.m. in London.
The indexes typically decline as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The S&P/LSTA U.S. Leveraged Loan 100 index fell 0.16 cent to 94.08 cents on the dollar, the lowest since Jan. 7. The index, which tracks the 100 largest dollar-denominated first- lien leveraged loans, has dropped from 96.48 cents on Feb. 14, which was the highest since November 2007.
In emerging markets, relative yields narrowed 2 basis points to 294 basis points, or 2.94 percentage points, according to JPMorgan Chase & Co. index data. Spreads reached 296 on June 16, which was the widest since Aug. 31.

Junk Issuers

U.S. junk-rated issuers have sold $10.9 billion of bonds in June, the least for the same period of any month since July 2010 and down from an all-time record of $45.1 billion in the whole of May, Bloomberg data show.
GCL-Poly Energy Holdings Ltd. and China Qinfa Group Ltd.
both pulled planned bond issues this month, citing volatile markets and a U.S. probe into accounting practices of some Chinese companies trading on U.S. stock markets. In Europe, Denmark’s Nykredit Bank A/S and Finnish lender Pohjola Bank Plc postponed deals citing market conditions.
High-yield markets are facing “the most bearish sentiment we’ve seen in the leveraged markets in probably 12 to 18 months,” Joseph McGrath, head of global leveraged finance at Barclays Capital, said at a June 20 conference with reporters in New York.

‘Liquidity Freeze’

The ability to refinance debt and extend maturities by selling bonds is a major reason why Moody’s said June 7 that the global speculative-grade default rate fell to 2.4 percent in May, from 7.6 percent a year earlier. The New York-based firm predicts the rate will decline to 1.5 percent by the end of the year, “absent a liquidity freeze,” according to Albert Metz, the firm’s director of credit policy research.
Greek Prime Minister George Papandreou faces a confidence vote as lawmakers decide whether to accept austerity measures needed for the debt-ridden nation to access the next part of its international bailout.
The crisis in Europe is hurting global growth while the U.S. Federal Reserve prepares to end its $600 billion stimulus program. The IMF cut its forecast for U.S. growth in 2011 on June 17 for the second time in two months, predicting the economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April.
In China, the world’s second-largest economy, the central bank announced a half-percentage point boost in the reserve requirement ratio for lenders on June 14, adding to four interest-rate increases since early 2010 to cool inflation and causing investors to speculate that growth will slow.

‘Ripple Effect’

“There’s a ripple effect spilling over from Greece,” said Tatjana Greil Castro, who helps manage about $12 billion in high yield as a money manager at Muzinich & Co. in London. “Risky assets are selling off significantly and that’s reflected in high-yield.”
This month’s decline in Bank of America Merrill Lynch’s Global High Yield Index, which tracks 2,655 bonds with a par value of $1.29 trillion, has trimmed year’s gain to 4.55 percent and to 93.5 percent since the end of 2008.
Even with the recent selloff, yields remain at about record lows, falling to an average of 7.56 percent last week from almost 22 percent in March 2009. McGrath said Barclays is still forecasting total returns of about 8 percent for the year.
“Over the course of the last two years every time we had a shock to the system the shock waves became shorter and shorter,” he said.
All industry categories in the Bank of America Merrill Lynch index have fallen this month. Banks led the declines, losing 2.5 percent on average amid concern a Greek default would damage their capital bases and disrupt credit markets. Moody’s said this month it may downgrade BNP Paribas SA and two other big French banks because of their investments in the southern European nation.
“The Greek situation plus weaker-than-expected economic numbers are keeping buyers on the sidelines,” said Marc Gross, who helps oversee $3 billion in fixed-income funds as a money manager at RS Investments in New York. “Cash will build over time as the new-issue machine remains quiet and accounts will focus on finding oversold bonds in the secondary market.”