Number of Distressed Bonds Rising at Rapid Rate

Amid the credit crunch surrounding the subprime crisis, the number of distressed bonds in the market has risen sharply as worries about the associated risk of defaults escalates. Bloomberg reports that the number of distressed bonds is increasing at the fastest rate since 2003, while a Merrill Lynch index indicates the number has quintupled to $24.8B since June. So-called distressed corporate bonds yield at least 10 percentage points more than Treasurys, given the higher risk they entail because of the greater chance of default. Moody's expects the percentage of borrowers missing payments to double to 3.5% next year. While it may not come as a surprise that names such as Residential Capital and WCI Communities are so classified given the problems in the mortgage market, based on their yields, the debt of amusement park operator Six Flags Inc. and pizza chain Uno Restaurant Corp. also are distressed. Yet, despite the higher risks, Bloomberg says the market's appetite for the securities hasn't subsided with investors sinking $83M into junk bond funds during the week ended August 29. Junk bond sales reached a record $101B in the first half, and investors who specialize in distressed debt are gearing up for more opportunities, raising $23B through mid-August, breaking the 2006 record of more than $16B.

Sources: Bloomberg
Commentary: Just How Widespread is the Fallout from the Unfolding Credit Crisis? • Speculator Defaults Aggravating Housing Crisis • Rising Defaults on Credit Card Bills
Stocks/ETFs to watch: WCI, SIX

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Comments

[goatfarmer:]

No surprise that the distressed category will be the first to suffer in a credit krunch. The more interesting category is the junk bond fund, many of which are now yielding 9% and above. (HIO, JPS, DIV, EAD, COY, etc). These funds are wel diversified, such that default by one or two bonds wouldn't make too much of a dent in the portfolio. But they took a bid slide in mid-August, dropping as much as 30 or 40% from highs in June. Many are recovering fast. EAD jumped 6% yesterday. Most unusual for a bond fund. It will be interesting to see how this group fares over the next six months.

2007 Sep 05 09:36 PM

[Andreas Stover:]

These distressed bonds and default rate numbers are likely to get worse if the standards on bank C&I loans tighten as this will push the worst of the ponzi borrowers over the edge.

The July data from the Senior Loan Officer Opinion Survey on Bank Lending practices indicates that we might be in the middle of a wave of such tightening.

This doesn't necessarily mean that junk bonds are not undervalued right now, just that their values cannot be properly estimated using current default rates.

cyclesandtides.blogspo...

2007 Sep 05 11:12 PM