Distressed debt datapoint of the day

By Felix Salmon
December 18, 2009
Henny Sender reports:

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Henny Sender reports:

Bonds trading at less than 50 cents on the dollar now account for only 1.1 per cent of the high-yield market, or $8.9bn in securities, down from 27.5 per cent, or $202bn in bonds, a year ago, according to JPMorgan data.

This isn’t a bubble, either, where bonds rise in secondary-market price but where there’s still no primary market for new issuance. To the contrary, private-equity shops and others have been quite successful of late in refinancing their leveraged loans in the high-yield market.

I’m not sure where all this demand for risky debt is coming from, given that everybody still expects a significant wave of defaults over the next couple of years: there can’t be that many fixed-income investors who are happy converting their debt to equity and taking control of a distressed company. Maybe junk bonds are the new equity: somewhere you can make a lot of money by spotting a compelling story, even if the rest of the market is moving in an unpredictable manner. Just don’t come crying to me when it all ends in tears.


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I don’t follow your reasoning why this is not a bubble. In the last credit bubble there was so much demand for bonds that they were able to securitize mortgages with crap underwriting well after the problems with subprime were known. If bonds are trading above their realistic values, that sounds like a bubble to me, whether it is in the primary or secondary market. What difference does it make to the buyer? Whether he’s buying at a premium or discount, he or she’s going to pay the same price on the primary or secondary market.

Posted by TimC | Report as abusive

This huge liquidity needs an outlet, be it equity market or the high risk bond market.

Remember Alan Greenspan, he had dropped rates so low for so long that he affectively chocked the fixed income market. So to cater for this pent up demand, market came up with rather exotic instruments, bundling all kinds of different risk assets and create a high yield fixed income instrument. We know what that led to.

Reasons are different but we again have high liquidity, we are again seeing the same demand for assets, but we are saying not not again, at least not so soon. This is no bubble.

Posted by SLJ | Report as abusive