| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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Bond Buyers Accept More Risk |
WSJ.com, April 5, 2010
Credit markets have staged a comeback. Now, too, it seems some of the exotic securities that were hallmarks of the credit bubble are having a small renaissance of their own.
The rally in the corporate-bond market and a steady supply of easy money courtesy of the Federal Reserve are encouraging investors to take more risks. And Wall Street bankers and companies are taking advantage where they can.
Some of the riskier borrowing practices that flourished at the height of the bubble have begun to find buyers. Among them: so-called pay-in-kind bond that enable companies issue more debt as interest payments, rather than pay cash. Companies are also issuing bonds to pay big dividends to their owners. Citigroup last week arranged a collateralized loan obligation, a complex security of loans that are sliced and diced and sold to investors. Some firms are also trying to pull together bonds backed by mortgages that aren't guaranteed by the government.
"We've been through a period where nothing really ambitious got done," says Steven Miller, head of S&P's Leveraged Commentary and Data group. "Now we're entering a recovery-phase period, similar to 2004-05 or 1995-96, where we're starting to see people push at the edge of the envelope."
Viewed charitably, the reawakening of alternative credit instruments and methods suggests that financial markets are healthier, with investors willing to take more risks and give companies more ways to access the cash they need to help their businesses grow. And these practices aren't nearly widespread enough to suggest another bust is imminent.
But with Federal Reserve policy still easy, and with investors' hunger for yield encouraging them to take ever-greater risks, the trends bear watching as potential signs of trouble. The recent rise, collapse and recovery of credit markets in quick succession suggest another dangerous expansion of risky credit behavior could happen equally quickly.
The trend toward riskier credit behavior has been slowly gathering steam for months. John Bilardello, head of Standard & Poor's global corporate credit-rating business, said as long ago as January that he saw signs of "credit amnesia" creeping into the market.
At the time, his evidence consisted of a handful of what are called dividend recapitalizations, deals in which private-equity firms pile fresh debt onto companies in their portfolio in order to recover some of their initial investment. Before the credit meltdown, such deals were derided as signs that the credit bubble had gone too far.
In the months since Mr. Bilardello spoke, dividend recaps have been on a fresh tear: About $8.8 billion of debt was issued to pay dividends in the first quarter, compared with $7.9 billion in all of 2009, according to Mr. Miller.
Meanwhile, other problem children of the credit bubble have tiptoed back into the market. Last week brought the year's first "payment-in-kind toggle," or PIK-toggle, bond, which let borrowers pay interest with more debt instead of cash. There have also been a few "covenant light" loans, which loosen some of the typical restrictions on borrowers. It is only natural for companies to want to borrow money on the easiest terms possible. The banks they employ to sell their bonds and loans have a mandate to push the envelope on trying to get investors to accept easier terms.
In the credit bubble, their job was easy-investors accepted easy terms without a fuss. Following the bust, however, much of the power has been back in the camp of investors. Their newfound caution may be one reason why a handful of covenant-light and PIK-toggle deals late in 2009 have so far been followed by only a trickle of similar deals.
"I still think there is a decent amount of discipline on the part of buyers. I'm not ready to say we have lost it," says Ned Zachar, a portfolio manager at KLS Diversified Asset Management, a fixed-income hedge fund in New York.
He adds, however: "If we see multiple PIK-toggle deals as a means to defer debt service, I think that would be an unfortunate mid-2000s flashback."
After a neck-breaking rally, much of the juice has already been wrung out of less-complicated corporate credit that has taken corporate bond yields, which move in the opposite direction of price, well below their levels before the Lehman Brothers meltdown.
Junk, or below-investment-grade, corporate debt, now yields less than six percentage points more than risk-free Treasury debt, well below the long-term average.
Now other, more-exotic credit markets are opening up again that could lure investors away from these more-traditional forms of debt. Last week brought news of the possible return of mortgage securities backed by loans that don't conform to Fannie Mae and Freddie Mac loan-size limits.
The market for debt backed by still-troubled commercial real estate is showing some initial signs of life. There were $2.9 billion in commercial mortgage-backed securities issued in the first quarter, according to Dealogic, compared with $693 million in the quarter a year ago. Those deals contained mature loans, but bankers are also working on creating bonds with new commercial-mortgage loans. However, these potential deals are unlikely to trigger a full return to the commercial-property debt market anytime soon, because of tighter lending standards and uncertainty over new securitization regulations, bankers and analysts say.
Issuance of leveraged loans, or loans to companies that already have a lot of debt, hit $120 billion in the first quarter, up 56% from a year before, according to Dealogic.
Leveraged-loan prices in the secondary market have roared back to roughly 92 cents on the dollar from their December 2008 nadir of 56 cents, according to financial-data provider Markit.
At the moment, most observers say, these all seem like healthy developments rather than harbingers of another dangerous credit bubble. These instruments didn't cause the credit crisis, the thinking goes; their overuse and abuse did. Investors are at least familiar with these credit flavors and fully understand the risks.
What's more, the volume of aggressive credit deals today pales in comparison to the height of the bubble. The $8.8 billion in dividend-recap debt this year compares with $55 billion issued in 2007, Mr. Miller of S&P says.
There were $28 billion in leveraged buyouts in the first quarter globally, less than 10% of the volume of their peak in 2007, according to Dealogic.
Many of the more-aggressive deals recently have involved companies with better credit ratings and lower leverage than in the bubble days. "These loans are not being made to anyone who walks in the front door, which is what was going on at the peak of the bubble," says Daniel Alpert, managing partner of Westwood Capital LLC, a New York investment bank.
Investors in such deals lately have wrung other concessions from the borrowing companies, often in the form of higher yields. Gun-maker Freedom Group had to pay a little more for the privilege of issuing the year's first PIK-toggle bond, Mr. Miller says.
Investors have also pushed to cut the size of the dividends in some recent recap deals, says Mr. Miller, such as those for Tampa, Fla., glass-container maker Anchor Glass and Nashville, Tenn., hospital operator Ardent Health.
"It is clear the market is more cautious and conservative today," says Armins Rusis, global co-head of fixed-income at Markit, "and frankly I think it's warranted, not only because of past experience, but also some of the uncertainties that still remain in the broader economy."
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