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| High-yield bond costs soar as defaults rise | | |
ALLAN ROBINSON (Globe & Mail Report on Business) The credit markets are thawing but the cost of borrowing in the distressed debt or high-yield bond markets remains at record highs as defaults are starting to climb, my colleague Allan Robinson writes in Monday's Report on Business. "Over the course of the next 90 to 180 days we are expecting to see quite a jolt to the U.S. economy," said Michael Torkin, a bankruptcy and reorganization partner with Shearman & Sterling LLP, a law firm. The jolt will come in mid-April, when the auditors of North America's largest auto companies are likely to issue in the audited reports warnings that the accounts presented are based on assumptions that the manufacturers will be able to continue as "going concerns," Mr. Torkin said. "Almost every single speculative loan is trading below 80 cents [U.S.] on the dollar," he told Mr. Robinson. Today about 87.5 per cent of the distressed securities are trading at this depressed level, compared with 13 per cent at the end of 2007. The low price at which even performing credits are trading makes it difficult to get new financing deals done, said Michael Baker, a Shearman & Sterling finance partner, in a presentation with the University of Toronto Faculty of Law last week to lawyers and financial executives. Merger and acquisition activity in the fourth quarter was at its lowest rates since 1991, said Shearman & Sterling merger-and-acquisition partner, Scott Petepiece. A pickup in activity is unlikely for another nine to 12 months, he said. The deals that are done in 2009 are likely to be mergers of necessity in which troubled companies need to align with stronger players in order to survive. The banks' inability to lend is leading to fire-sale deals and that also leaves only cash-rich companies in the acquisition game. "There's a lot of quality assets available by distressed sellers," Mr. Torkin said. "These assets might not even be in need of operational restructuring." While stresses in the money market and conventional investment-grade debt markets have eased, the risk-measurement in the high-yield debt remains near record highs. Mr. Robonson notes credit-default swap spreads, a type of insurance, measure the annual cost for protection against default by major companies. The spreads on five-year North American high-yield bonds over U.S. Treasuries have soared to 1,486 basis points recently from 713.8 a year ago and 212.8, two years ago, according to data provided by Markit Group Ltd. (A basis point is 1/100th of a percentage point). "A global recession is gaining momentum and defaults are rising at an alarming pace," said Gavin Nolan, vice-president of credit research for Markit Group, in a report to clients. "Companies are under pressure to strengthen their balance sheets at any cost." Sales of investment-grade and junk bonds have picked up this year, according to Bloomberg. The yield spread on conventional investment-grade bonds is between 450 and 800 points above the London interbank offered rate (Libor), which is the interest rate banks charge each other for overnight lending, Mr. Torkin said. Typically the spread would range from 200 to 250 points. | | |
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