By Dena Aubin
NEW YORK, Feb 10 (Reuters) - A rally in junk bonds is
opening funding to a handful of U.S. companies, but a credit
freeze lingers for dozens of others, threatening to push bond
defaults to Great Depression levels this year.
Even after junk bonds overall posted their best January
performance in years, the weakest names are still being crushed
with borrowing costs going through the ceiling as investors
shun names at risk of default.
"It's not back to normal yet," said Andrew Feltus,
portfolio manager at Pioneer Investments in Boston. "There's a
lot of distressed issues out there and there's not that much
demand for them."
Dozens of companies, ranging from General Motors to
Rite Aid Corp , have bonds trading at yields of more
than 30 percent, meaning they would have to pay about that much
to sell or refinance debt.
Nearly one-quarter of all high-yield bonds are trading
below 40 cents on the dollar as weak companies fight a
deepening recession, Morgan Stanley said in a recent report.
If borrowing costs stay elevated, "high-yield companies
will have trouble operating profitably, let alone refinancing
themselves," Morgan Stanley said.
DEFAULTS QUADRUPLE
Bankruptcies have already surged as consumers reeling from
layoffs and home foreclosures rein in spending, pushing
corporate sales into a tailspin.
The worsening recession prompted Moody's Investors Service
to raise its default forecast on Tuesday, with both the U.S.
and global rates now expected to peak at 16.4 percent in the
final quarter. That rate would top records set in the Great
Depression, when the U.S. junk bond default rate hit 15.9
percent and the global rate peaked at 15.4 percent.
The global default rate has already quadrupled to 4.8
percent from 1.1 percent a year ago, Moody's said.
Rising defaults could counteract benefits of a bank rescue
plan rolled out on Tuesday and a huge economic stimulus package
approved by the U.S. Senate to ease the worst recession in 70
years. For details on both plans click on [nLA744901].
Junk bonds for months have been pricing in massive
defaults, with their yields surging to record highs relative to
Treasuries. The spread between Treasury and junk bond yields
has narrowed from a peak of over 2000 basis points but is still
much higher than in the last two recessions, said Kenneth
Emery, director of corporate default research for Moody's.
"The high-yield bond spread right now is still around 1600
basis points and in the previous two recessions it barely
reached 1000 basis points and then quickly declined," he said.
"The ability to get access to the capital market is extremely
tight."
CONSUMER COMPANIES SHUNNED
U.S. junk-rated companies sold about $4.9 billion of bonds
in January, more than the previous five months combined. But
many of the sales were from higher-quality companies and they
still had to offer double-digit yields.
Landry's Restaurants Inc , an operator of casual
dining restaurants, last week sold bonds yielding more than
20.3 percent, the highest yield on any new junk bond since
2005, according to Thomson Reuters data.
"I think the market's just concerned about investing in any
sort of consumer-based company," said Barbara Cappaert, analyst
for high-yield research firm KDP Investment Advisors. "You have
a lot of gaming companies, a lot of leisure companies trading
at close to 15 to 20 percent yields," she said.
Gaming and leisure companies accounted for several defaults
in 2008, including a bankruptcy filing by Tropicana
Entertainment and a "distressed debt exchange" by Harrah's
Entertainment. A distressed debt exchange is a type of debt
swap counted as tantamount to a default by rating agencies
because investors receive less than the par value of their
bonds.
"You've flooded the system with money out there but the
financial system is not on its feet yet," said Pioneer's
Feltus. "That may not be necessary to have a broad high-yield
rally but it sure would help."
(Reporting by Dena Aubin, Editing by Chizu Nomiyama)
(dena.aubin@thomsonreuters.com; +1-646-223-6325; Reuters
Messaging: dena.aubin.reuters.com@reuters.net))
Keywords: JUNK DISTRESS
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