Nearly 1,000 high-yield investors have been gathering for a conference in the Arizona desert this week.
The setting is perhaps symbolic of the barren state of the junk bond market, which has just recorded its worst start to a year.
In Europe, the market has been closed for primary new issuance since July, while the US has only seen 12 deals this year compared with more than 80 at the same stage last year, according to Dealogic.
Separately, data from Merrill Lynch show that junk bond prices have fallen on average 3.9 per cent this year, wiping about $35bn off values globally.
The backdrop for Credit Suisse’s annual conference on high-yield, which is being held in Phoenix and finishes on Thursday, could not have been much worse. Yet many bankers believe the outlook could deteriorate further.
Barnaby Martin, European credit strategist at Merrill Lynch, said: “The bad assets that are out there in the market have yet to be cleaned up. The process of deleveraging in financial markets is not over and the weakening US economy still poses a credible risk to credit markets.”
Willem Sels, credit strategist at Dresdner Kleinwort, added: “There is still a lot of selling pressure. Prices could fall further. Most investors are still very risk averse, so high-yield is going to continue to suffer.”
For speculative grade companies, it indicates that defaults will start to rise in the coming months as problems over refinancing and meeting covenant criteria bite.
Moody’s, the US ratings agency, expects global default rates among high-yield companies to rise to 5.4 per cent by the end of the year from the current 1.3 per cent
However, levels around 5 per cent are still only the historic average, suggesting the outlook is not as bad as it would seem at first.
Ed Eyerman, managing director for leveraged finance at Fitch Ratings, said: “Do companies want to borrow in this climate? Of course not.
“But a lot of companies, notably recent LBOs, don’t have to, as they financed themselves with long-term debt and committed lines on flexible terms in 2006 and 2007?.?.?.?Typically, you see companies default in the third year of a financing.”
There is also far more optimism among issuers following the US Federal Reserve’s emergency intervention to shore up Bear Stearns and last week’s aggressive interest rate cuts.
One banker at the Credit Suisse conference said: “The Fed’s action has made a lot of difference to sentiment.
“If this conference had been held just a couple of weeks ago, it would have been a real grim-fest. The mood is surprisingly constructive, and we are seeing some signs of recovery.”
For example, the iTraxx Crossover index, which tracks the credit default prices of 50 mainly high-yield companies in Europe, has recovered some of its losses in the past few days. It now costs €550,000 to insure €10m of debt against default over five years, €30,000 less than at the start of the week. But the cost is still close to recent highs.
Another development, according to bankers, is inquiries over the state of the market for launching bonds from double B corporates – the most highly rated companies in the junk-grade sector.
“This would not have happened a month or so ago,” said another banker.
“It is quite a good sign and suggests things can get better, although it is premature to get too optimistic. These are just inquiries. We still haven’t seen a deal in Europe since the summer.
