UPDATE 2-Subprime mess spreads to junk bonds, LBOs -PIMCO
(Adds quotes, background on junk-bond market and the economy)
NEW YORK, July 24 (Reuters) - Soaring defaults in the subprime mortgage market are spreading into the U.S. credit markets, producing a "sudden liquidity crisis" in the high-yield bond sector, according to widely followed bond manager Bill Gross.
A lack of confidence has shut down the markets for lending and backed up new junk-bond offerings -- a major source of funding for leveraged buyouts and may become a factor ultimately impacting the U.S. economy, said Gross, manager of the world's largest bond fund at Pacific Investment Management Co., or PIMCO. He made the comment in his August investment outlook letter.
"That growing lack of confidence -- more so than the defaults of two Bear Stearns hedge funds and the threat of more to come -- has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: Absolutely nothing is moving," Gross said.
"Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole -- Nathan's Famous Coney Island style -- are having a serious bout of indigestion."
That's bad news for the private equity crowd, Gross said.
He cited "the Blackstones, the KKRs and the hedge funds of recent years," saying they "also climbed to the top of the pile on the willing backs of fixed-income lenders too meek and too passive to ask for a part of the action."
Gross also said the U.S. economy will come under pressure from increased cost of financing.
He said "the sudden liquidity crisis in the high-yield debt market is just the latest sign that there is a connection, a chain that links all markets and ultimately their prices and yields to the fate of the U.S. economy."
Moody's Investors Service said a liquidity crunch is inevitable for low-rated U.S. companies as the percentage of weak corporate borrowers grows.
"If lenders turn cautious -- and eventually they will -- access to additional funding can't readily be assumed for speculative-grade companies," Moody's said.
GOING OFF THE JUNK DIET
Last week marked the slowest July for junk bond offerings since 1994, according to Dealogic, with only three deals totaling $708 million priced. It was also the sixth week in which investors yanked money out of mutual funds that invest in high-yield securities.
Moreover, sentiment worsened when the chief executive of home builder KB Home (KBH.N) said last week he does not expect the overall home market to bottom out until the end of next year.
Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee last week that losses from the subprime mortgage fallout could reach $100 billion. Continued...
