Tuesday, January 02, 2007

"Junk Bond Schadenfreude"

as nelson would say / wie nelson es sagen würde "HA HA!"

what a shock to junkbondinvestors. there is really risk involved..........:-)

was für ne überraschung. es scheint so als wenn doch noch risiko im junkbereich vorhanden ist.....:-)



Junk Bond Boom Lures Crowd to Bulgarian Steel, Kiev Chickens
Jan. 3 (Bloomberg) -- A dozen Merrill Lynch & Co. clients endured a flight to Serbia and a five-hour taxi ride last month on their way to visit a Soviet-era steel mill whose bonds were plunging.


Kremikovtzi AD's notes had just tumbled 30 percent after the Bulgarian steelmaker said it would post a $7 million loss for the year. Investors were alarmed because the company estimated a $34 million profit in April, when Merrill arranged the sale of 325 million euros ($427 million) of 12 percent bonds.

Investors bought Kremikovtzi's securities because those yields are hard to find outside emerging markets. Bondholders who used to get 24 percent on Xerox Corp. in Stamford, Connecticut, or Remy Cointreau SA in Paris now finance a Kiev chicken farm and a Moscow ball-bearing factory for half the rate of interest.

``People are having to go further and further down the ratings scale to get yield,'' ...... ``It was risky, but people thought they were getting paid for the risk.''

European bonds rated below investment grade yield 2.3 percentage points more than government debt, down from 16.5 percentage points in 2001, ....
Bond Sales Soar
Nowhere have yields fallen more than for securities with the lowest credit ratings
. Bonds ranked Caa by Moody's and CCC by S&P, the category above default, pay 4.6 percentage points more than government securities, down from 42 percentage points five years ago, Merrill data show.

Kremikovtzi is among 10 companies that sold a record 5.5 billion euros of bonds with the lowest ratings in 2006, ..... The steel mill is rated Caa1 by Moody's and CCC+ at S&P.

Investors are clamoring for junk bonds because the yield premiums on investment-grade corporate debt have narrowed to 0.51 percentage point on average from 0.84 percentage point in 2001, according to Merrill data.

Investors poured a net 1.7 billion euros into high-yield corporate bond funds, double the 864 million euros in 2005,

The increasing demand is making it easier for companies to sell bonds, no matter how risky. Sales of the lowest-rated debt jumped 45 percent in the past year and notes with non-investment grade ratings totaled a record 38 billion euros, according to data compiled by Bloomberg. Junk bonds returned 11 percent in 2006, compared with 0.7 percent on investment-grade debt, Merrill's data show. European government bonds lost 0.28 percent. (looks like trouble is brewing..., sieht so aus als wenn sich da ärger zusammenbraut....)



Fewer Defaults
``People need to reach for yield, so they're buying into riskier assets,..... ``People who have done so were rewarded and others have followed.''

Bondholders are more confident because companies defaulted on fewer than 2 percent of junk bonds in 2006, compared with as much as 22 percent five years ago, according to Moody's data. Defaults will probably increase to 2.8 percent by the end of 2007, less than half the average 7.3 percent in the last five years, according to Moody's.

`Bit Crazy'
...Bondholders will keep buying riskier securities until an increase in defaults makes them wary
, ....

``The credit market went a little bit crazy last year and will continue to be crazy this year,'' .... ``It normally takes a blow-up somewhere before investors stop buying high-yield.'' ....

Debt Burden
Yields on junk bonds are falling even as companies take on more debt
. The average non-investment grade company in Europe owes 5.4 times annual earnings, up from 4.2 times five years ago, according to S&P's LCD.

Treofan Holdings GmbH, a Raunheim, Germany-based maker of wrapping for cigarette packs, sold 170 million euros of 11 percent bonds due 2013, boosting its debt ratio to more than 7 times earnings. The company probably will spend more than it earns in 2007, S&P said......
Kremikovtzi almost tripled its long-term debt to 910 million lev ($611 million) last year when it sold the 12 percent notes. Investors bought the bonds in part because the company is controlled by Pramod Mittal, whose brother, Lakshmi Mittal, is chief executive officer of Arcelor Mittal, the world's largest steelmaker. The securities also attracted investors because they included warrants that allowed holders to buy Kremikovtzi shares. The bonds rose as high as 104 cents after the sale in April.

The securities tumbled to 70 cents on Nov. 15 after Pramod Mittal projected a loss for 2006.

Bad Weather
....Of the 178 junk bonds included in Merrill's European high- yield index, only two are trading below Kremikovtzi's current price of 83 cents.

Poultry Producer
Ukraine's largest poultry farmer
, Myronivsky Hliboproduct, sold bonds for the first time, spurred by investor demand for higher yields. The company, known also as MHP, raised $250 million to expand into beef, goose liver and fruit. The 10.25 percent notes due 2011 gained 2.4 percent since the sale in November, reducing the yield to 9.6 percent. Moody's rates the securities B2.

European Bearing Corp. in Moscow sold $150 million of 9.75 percent three-year notes in October, its first offering to international bondholders.

``You're seeing for the first time companies as far east as Ukraine and Russia doing high-yield offerings,'' said Carter Brod, capital markets partner at law firm Baker & McKenzie in London, which advised MHP on its bond sale. ``It appears investors can't get enough bonds from eastern Europe.''

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3 Comments:

Anonymous Aaron Krowne said...

Too much money chasing too few good assets.

9:49 AM  
Anonymous Anonymous said...

Arguably, Kiev Chicken fills more stomachs than Remy Cointreau and is a better business to be in.

2:52 PM  
Blogger jmf said...

hi aaron,

you are 100% correct.

but i´m sure that "times are changing"

hi ano,

the only minus is that tschernobyl is not that far away from kiev.....
:-)

3:27 AM  

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