By Caroline Salas
March 25 (Bloomberg) -- High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight.
Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, OppenheimerFunds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse.
While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to ``struggle'' for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll.
``The moves have been absolutely vicious,'' said Arthur Calavritinos, whose $1.2 billion John Hancock High Yield Fund has lost about 9.8 percent since December. The Boston-based manager said it's the worst market since he started in finance in 1985.
Just 11 companies have issued $9 billion of junk bonds in the U.S. in 2008, according to data compiled by Bloomberg. This time last year, 83 had sold $39.5 billion. Junk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by Standard & Poor's.
Spreads Widen
The slump is hurting more companies than ever before. Some 51 percent of U.S. corporate borrowers are rated below investment grade, up from 28 percent in 1992, according to S&P.
About $1 trillion of the debt is outstanding, compared with less than $10 billion 30 years ago. Two of the world's biggest automakers, Detroit-basedGeneral Motors Corp. and Dearborn, Michigan's Ford Motor Co., were cut to junk within the past three years, as was San Antonio-based Clear Channel Communications Inc., the largest U.S. radio broadcaster.
Investors are demanding yields averaging 8.07 percentage points more than Treasuries, up from 5.92 percentage points at the end of last year, and a record low of 2.41 percentage points in June, index data from New York-based Merrill show. The spread reached 8.62 percentage points on March 17, the most since 2003.
`Ouch'
```Ouch' would be an understatement,'' said Stephen Antczak, a high-yield strategist at UBS AG in Stamford, Connecticut. In December he predicted the debt would rally in January. Now he says he's ``still bearish'' and expects spreads to widen 0.5 percentage point to 1 percentage point next quarter.
Peter Acciavatti, head of global high-yield strategy at JPMorgan in New York, predicts spreads will remain more than 8 percentage points ``for some time, or at least until some remnant of an economic recovery is in sight,'' he said in a research note March 14. The biggest difference recorded by Merrill, whose index started in 1996, was 11.2 percentage points in October 2002.
Moody's said the default rate climbed to 1.3 percent last month from 0.9 percent in December, after Quebecor World Inc., a Montreal-based printing company, and Buffets Holdings Inc., an Eagan, Minnesota-based restaurant chain, filed for bankruptcy. The New York-based credit-rating company raised its forecast this month to 5.4 percent from 4.6 percent by yearend.
Every industry group except energy and utilities posted negative returns this year. Bonds of finance companies lost 20 percent; media bonds, 10.2 percent; and real estate securities, 9.9 percent, Merrill index data show.
`So Huge'
``We've had no frame of reference for this kind of pervasive credit crisis,'' said Marilyn Cohen, president of Envision Capital Management in Los Angeles. ``The problems are so huge, and they're everywhere.''
Envision, which manages a $215 million fixed-income fund, is ``certainly not'' adding riskier investments, said Cohen, who has worked in the fixed-income market since 1979.
John Hancock, OppenheimerFunds and Fidelity, managers of three of the worst performing high-yield debt funds this year, own R.H. Donnelley Corp., the U.S. publisher of phone directories, regulatory filings show.
The Cary, North Carolina-based company's bonds plunged 24 percent in February, more than all but one other top-50 issuer in the high-yield market, according to Merrill index data.
``We're a highly levered company, which are very out of favor today,''David Swanson, the publisher's chief executive officer, said in an interview this month. It would be difficult and expensive to sell debt, he said.
Northwest, Trump
Hancock's Calavritinos said his fund was hurt mainly by its investment in airlines including Eagan, Minnesota-based Northwest Airlines Corp., which dropped as oil prices rose. Other holdings include Charter Communications Inc., a St. Louis- based cable company, and Trump Entertainment Resorts Inc., a casino owner in Atlantic City, New Jersey.
The amount of distressed debt in a Merrill index tripled to $175 billion this year, and was only $4.4 billion in March 2007. Bonds that trade at a spread of 10 percentage points or more over Treasuries are considered distressed because investors are concerned that the borrower will default. More than 180 companies have debt that is now considered distressed, Bloomberg data show.
`Great Buying'
Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisers, says the surge is giving him an opportunity to make money. The New York-based firm invests in bankrupt and distressed companies.
``This is going to be, in history, a great buying time at low values,'' Patterson said.
The $3.4 billion Fidelity Advisor High Income Advantage Fund, which invests in high-yield bonds, preferred shares and convertible securities rated below investment grade, lost 7.52 percent this year. The $2.1 billionOppenheimer Champion Income Fund, which mainly buys high-yield debt, has tumbled 13.1 percent.
Alexi Maravel, a spokesman for Boston-based Fidelity, said shareholders expect the company to ``invest for the long term,'' and ``focusing on the year to date is a very, very short period of time.''
The Oppenheimer Champion fund's underperformance is due to investments in ``extremely highly rated securities where the team feels default risk is negligible -- very much in contrast to the assessment of risk in the high yield market,'' Jeaneen Pisarra, a spokeswoman for New York-based Oppenheimer, said in an e-mail.
Recession Coming
Junk bonds have returned on average 8.5 percent from 2002 through 2007, according to Merrill Lynch index data.
The $188 million Morgan Stanley High Yield Securities Inc. fund is the best performing this year, having lost 0.01 percent, according to Chicago-based Morningstar. The fund's second- biggest investment is in a Morgan Stanley cash fund, filings show.
The market isn't ``necessarily pricing in the recession that's most likely coming,'' said Henry Choi, managing director and head of the U.S. high-yield team at Morgan Stanley Investment Management in West Conshohocken, Pennsylvania.
To contact the reporter on this story: Caroline Salas in New York atcsalas1@bloomberg.net
