Friday, January 26, 2007

The Fairy-Tale Junk Bond Market / barrons

looks like some of the prudent bond funds managers are having a very hard time to find anything to invest in. must be frustrating ( same could be said to the prudent stockinvestors. just ask hussman.....). but once again this piece shows very powerfull that the main driver for the stockmarket is the willingness to cheap finance every takeover, buyback etc. so it is no wonder that the us credit quality is the worst in 25 years. just read the facts like looks like this number will climb higher in the near future.........

sieht so aus als wenn es einige anleihemanger gibt die nichts mehr finden wo sie ruhigen gewissens investieren sollen. frustrierend. das gleiche kann man auch für weniger aktienfondsmanager sagen ( braucht nur hussman zu fragen.....). aber dieser beitrag von barrons/keppler zeigt eindrucksvoll das die thematik der nicht vorhandenen risikoaufschläge der haupttreiber im aktienmarkt ist. solange alles was bei drei nicht auf den bäumen ist ne waghalsigeübernahem oder nen aktienrückkauf zu billigpreisen finanziert bekommt geht die party weiter. kein wunder das die us kreditqualität auf historischen tiefs ist. diese zahl wird sicher steigen

with almost half of all companies now rated below investment grade

As of September, junk, or speculative-rated issuers, defined as those rated "BB-plus" or below, stood at a record high of 49 percent, up from 48 percent at the end of 2005 and a low of 28 percent in 1992, S&P said.

Downgrades and mergers have taken an even higher toll on U.S. nonfinancial, or industrial companies, with 61 percent carrying junk ratings. !!!!!!

here are just a few examples on how buybacks have masked very weak numbers. every stock went sharply higher after the (debtfueled) buyback were anounced. / hier ein paar beispiele wo der angekündigte kreditfinanzierte aktienrückkauf wahre horrorergebnisse in kursgewinne verwandelt hat.

FORGET GOLDILOCKS. This is a Tinkerbell market.

As the Dow Jones Industrial Average set another record and the yield premiums of junk bonds collapsed to a new low Wednesday, Robert Kessler is stunned.

Complacency doesn't begin to describe investors' attitude toward risk, ....... Their acceptance of paltry rewards to take on risks requires "an active suspension of disbelief,"....(maybe they should put up warning signs like in singapore.../evtl. sollten die mal nach singapur fahren um sich anzusehen wie dort vor risiken gewarnt wird....) :-)

Yet, the markets seem to want to believe in fairies. Nowhere is this more apparent than in the speculative-debt sector, which no longer deserves the politically correct label of "high yield." Yields on junk bonds never have been lower relative to risk-free government securities.

According to the Banc of America Securities High Yield Index, junk bonds yielded a mere 2.85 percentage points more than comparable Treasuries, the tightest spread since 2.95 percentage points was recorded in May, 2005.

To paraphrase Churchill, never have so many paid so much for so little.

At their widest, junk bonds have paid a full 10 percentage points over riskless securities. That was during the darkest days for the market, as in 1992 following the collapse of Drexel Burnham, or 2002 at the bottom of post-tech bubble bear market.

Those astronomically high yields more than compensated for the manifold risks of the time. Conversely, today's low yields leave no margin of safety.

At the same time, this complacency about credit risk also has acted as an enabler for leveraged buyouts and other financial legerdemain, which has helped propel the equity markets to new heights.
and this is from the fantastic doug noland
January 24 – Bloomberg (Jesse Westbrook): “Wall Street firms are trying to figure out how to finance leveraged buyouts of $75 billion or more, twice the size of the largest deal on record, a Citigroup Inc. executive said. ‘I have talked about deals larger than $75 billion, conceptually,’ Tyler Dickson, Citigroup’s global head of equity capital markets, said… ‘I don’t know when larger LBOs will happen. People are discussing them.’ Buyout firms…announced a record $739 billion of leveraged buyouts last year, almost triple the 2005 total…” ( compare this to the chart from september! looks like the activity has accelarated since then. vergleicht das mit dem chart von september. seitdem hat sich tempo deutlich verschärft.)
The bank loan market has gotten caught up in the frenzy.
Banks flush with funds are falling over themselves to provide senior loans for LBOs, making for a cheaper source of financing than the junk-bond market. But as bigger chunks of these deals get funded in the loan market, there are fewer bonds to issue. And that is setting off a feeding frenzy among junk-bond buyers starved for paper.

For instance, the buyout of Aramark (ticker: RMK) by $1.78 billion in bonds, $550 million less than originally planned, after the bank loan portion was boosted by a similar amount, to $4.15 billion. A back-of-the-envelope calculation puts the savings at $10 million a year in interest on the deal as the result of shift to loans from bonds.

In the investment-grade bond market, Alcoa (AA) saw huge demand for $2 billion of fresh debt to fund the repurchase of 10% of its outstanding common shares. At the same time, the company bumped up its dividend by 13%.(and you know something is wrong when (often debtfueled) buybacks overtake capital spending...../und man weiß das irgendetwas nicht stimmt wenn oftmals kreditfinanzierte buybacks das capital spending überschreiten....)
Buyers weren't deterred by what Moody's Investors Service saw as a negative outlook for Alcoa's debt rating, currently single-A2. Margins haven't risen in tandem with record aluminum prices, Moody's says. And with heavy capital spending plans, the company will generate little or no free cash flow absent record aluminum prices, which Moody's calls unsustainable.

So, Alcoa is going deeper into hock to buy back stock and pay out more in dividends. Despite the resulting deterioration in the company's balance sheet, the market couldn't get enough of the bonds.

This willing belief in the Goldilocks scenario has Kessler shaking his head. The credit markets don't seem to remember how the fairy tale ends -- with Goldilocks fleeing the three bears and barely escaping with her life.

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