Junk-Bond Bubble Implodes Beyond Energy, Deals Scuttled, Yields Soar, Suddenly “Insufficient Demand”

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The year 2015 has just started, and already there have been two junk-bond casualties: the first on Thursday, and the second one today. They weren’t energy companies. Energy companies don’t even try anymore. They’ve been locked out. Both deals had to be scuttled because, even at the high yields they offered, there were suddenly no buyers. 2014 had been a harbinger: 17 junk-bond deals for $5.8 billion in total were shelved, most of them during the last four months.

Ever since the Fed unleashed its waves of QE, institutional investors, driven to near insanity by the relentless interest rate repression, have been chasing yields ever lower in a desperate effort to get some kind of return. In the process, junk bonds and leveraged loans boomed and spiraled to such heights that the Fed – which is never able to see any bubbles – and other bank regulators began fretting over a year ago about the risks they posed to “financial stability.” And in December, it was the Treasury that hit the alarm button about leveraged loans [read… Treasury Warns Congress (and Investors): This Financial Creature Could Sink the System].

Now QE Infinity is gone, interest-rate hikes are vaguely shaping up on the horizon, and institutional investors – bond mutual funds, for example – are getting second thoughts.

Junk bond issuance, at $13.4 billion so far this year, is down 32% from the same period in 2014, according to S&P Capital IQ/LCD’s HighYieldBond.com. Lower-rated companies are “forced to pay-up significantly,” explained LCD’s Joy Ferguson. And some of them, like the Presidio Holdings deal today, are having trouble finding any buyers – despite offering a yield of 11% or higher.

Investors are bailing out of junk-bond funds. In the latest week, $241.2 million were withdrawn from high-yield mutual funds and ETFs. The week before had been an exception, with an inflow of $897.5 million, after eight weeks in a row of relentless net outflows. And investors have been abandoning leveraged-loan funds for 28 weeks in a row, yanking out $738 million in the latest week alone.

Below-investment-grade companies are feeling the consequences.

So, Koppers Holdings announced on January 14 that it would issue $400 million in junk bonds. The company makes carbon compounds and treated wood products for utilities, railroads, the construction industry, and the like. With revenues in Q3 of $440 million, it booked a net loss of $2.7 million. Its shares (KOP), which peaked in November 2013 at $50, are now at $20.

It would use $300 million of the proceeds from these senior notes to pay off older senior notes due in 2019 and use the remainder for other purposes. After the announcement, S&P downgraded the company one notch to B+, on the expectations that EBITDA and credit measures would be weakened. Moody’s, which rates the company Ba3, lowered its outlook to negative from stable, blaming lower oil prices and “unfavorable end market conditions.”

And investors lost their appetite. So on Thursday, Koppers had to scuttle its junk bond deal. The first junk-bond casualty this year. The second one fell today.

On December 1, 2014, private equity firm American Securities announced that it would sell its portfolio company, Presidio, a technology consulting company with 6,000 clients and 2,200 employees, to another PE firm, Apollo Global Management. To pull off the deal in good PE form, Presidio would have to be loaded up with a lot more debt.

Presidio had already been loaded up with debt, most recently in March 2014, when it borrowed $650 million via a leveraged loan due March 2017. The money was then used to pay back older debts and hand American Securities a special dividend of $265 million, which is how PE firms strip-mine pure moolah out of their portfolio companies.

And for Apollo to buy Presidio, a lot more debt would be piled on top of it all. There would be a $600-million covenant-lite leveraged loan. It took some doing. But on Monday, the loan (rated B/B1) finally cleared, after the terms had been substantially sweetened since initial talk in early January. Investor-friendly provisions were added, and the yield to maturity was raised to about 7%, up from 6%. The transaction also includes a revolving credit line of $50 million and an accounts receivable securitization facility of $200 million.

The same day, Presidio was supposed to issue $400 million in junk bonds. They would be rated CCC+/Caa1, so neck-deep into junk territory. Initially, the yield had been pegged at around 9%, but potential buyers yawned. So sweeteners were added, and the yield was raised to 11%. Today, and despite all the added goodies, HighYieldBond.com reported that the deal was scuttled due to “insufficient demand at price talk.”

Government bonds in many developed economies are now sporting absurdly low yields – such as “negative” yields – as central banks push interest-rate repression to extremes. And other areas of the biggest credit bubble the world has ever seen are still inflating as well. But in the area of junk bonds, particularly at the lower-rated end, a sense of inconvenient reality has pricked the bubble. Investors have opened their eyes, and they’re asking questions, and they’re walking away from toxic deals that would have flown off the shelf not long ago.

Presidio and Koppers aren’t even directly involved in the oil-and-gas sector where junk bond issuance has collapsed, and where companies are not even attempting to issue junk bonds anymore. They’ve been locked out. They’re trying to make do with what they have. But time and money are running out for them. Read…  Junk Bonds and Fracking at Low Oil & Gas Prices: Wave of Defaults, “Outright Liquidations” Next

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  12 comments for “Junk-Bond Bubble Implodes Beyond Energy, Deals Scuttled, Yields Soar, Suddenly “Insufficient Demand”

  1. Julian the Apostate
    Jan 27, 2015 at 6:13 am

    Well I guess the silver lining is that some investors are coming out of the ether. Judging from the recent onslaught of the fiat money crowd on your comments section I’m sensing a bit of panic in their ranks. You must be worn to a frazzle keeping up with it all.
    But “be like the promontory against which the waves continually crash, but it stands firm, and tames the water around it.” -Marcus Aurelius Antoninus

  2. Julian the Apostate
    Jan 27, 2015 at 6:16 am

    Oops. Bad editing. Shoul be “…tames the fury of the waters around it.” My bad

  3. MC
    Jan 27, 2015 at 7:55 am

    Something’s definitely turning, despite ZIRP continuing all over the world.

    My bank recently offered me unusually well paying investments. By scratching a little deeper under the surface I found they were mostly made of junk and near junk rated bonds issued in Turkish lira and Australian dollars, sliced and diced as is customary in these investment offers. They look just a little more appetizing than those two year Ukrainian bonds yielding 29%.
    Banks have become a little more sophisticated when it comes at dumping junk upon their customers. A little before Argentina defaulted on her sovereign debt, many Italian and Spanish banks simply dumped them upon their customers by tempting them with generous yields and conveniently forgetting to mention Argentina was already fast approaching default. There’s a very good reason lawyers always remind their customers to read the fine print first.

    Another telling sign of this slow but steady turning of the tide are auto loans: after one year of advertised EAPR floating between 4 and 5% for most brands, this year advertised EAPR have already shot around the 8% mark for many low end brands such as Ford and Renault. Tightening money supply, as mainstream shills warned us? Not exactly.
    First, although junk auto loans are pretty much forbidden in most of Europe, when people cannot pay, they default on their obligations like everywhere else. With French, Italian and Spanish consumers still heavily leveraged, stagnating or contracting real wages and growing uneployment something has got to give. Bad loans have piled on Italian and Spanish banks’ books at a steady and frightening pace through all 2014, so much Italy is seriously considering setting up a State-financed “bad bank” to handle them, and to the Void with European rules. Those are there for the unwashed masses.
    Second, with more marginal loaners being steadily cut off the auto loan market, the highest yielding loans are effectively drying up. Hence solid payers are saddled with higher premia, nominally to reflect a riskier environment, but practically to keep the money flowing into “sliced and diced” funds made up of auto loans at the same rate.

    I personally don’t think we’ll see a “collapse” in the junk bond market as many believe, at least not yet. Yes, many companies will default on their obligations, but savers are so desperate for yield they will buy anything: it’s just a matter of offering 8% yield instead of 6%. Debt can be serviced by taking up even more debt, and we know that these days debts don’t matter.
    What can savagely maul junk bonds is an interest rate hike, and it is coming. Perhaps not this year, but it will come soon enough.
    The instant proper investment grade paper yields 3-4%, junk bonds will return where they belong. Unless central banks start scooping them up by the billion, no sane fund manager will want to hold that toxic stuff anymore.
    Low commodity prices, plus higher interest rates, plus impossibly high yields to attract investors… that will be carnage pure and simple.

    • Petunia
      Jan 27, 2015 at 10:03 am

      This morning I saw a tv ad for an old time American car brand offering loans with no interest for 5 years. In order to do this they need to discount the price which is evidence of deflation. All the furniture stores in the area have been offering no payments for 3 years since the financial crisis started.

      • Wayne
        Jan 28, 2015 at 10:35 am

        At the fleece-the-poor, high-interest end of the spectrum, Big Lots, Kmart and a number of other big boxes have gotten into the no-credit-check, no-money-down furniture “leasing” business. For consumers with better credit, the fleece is a department-store-branded credit card. I recently picked up a Belk card to get a 15% discount on a several hundred dollar purchase and was stunned to discover it carried an APR that would make a Mafia loan shark blush: 24.49%. And unlike a conventional credit card, paying in full does not result in future charges being carried forward to next statement. Payment can be due in a matter of days.

    • Vespa P200E
      Jan 27, 2015 at 3:55 pm

      While I do not foresee junk bond market collapsing any time soon I think default rate will up considerably with weakening economy resulting in complete write-downs resulting in junk bond funds taking a hit on share prices. Many will learn that there is darn good reason why these “companies” pay 10X money market returns as debt is either paid off or DEFAULTED.

      One more – CBs might have to start buying junk bonds to help out their bankster friends who loaded up on crappy papers and you can guess who will pay for this – taxpayers.

  4. Wayne
    Jan 28, 2015 at 10:44 am

    Meanwhile, in a parallel universe:

    Subprime Bonds Are Back With Different Name Seven Years After U.S. Crisis – Bloomberg Business – Linkis.com http://bit.ly/15IKRtR

    Paging George Orwell . . .

    “Investment firms are looking to revive the market without repeating the mistakes that fueled the U.S. housing crisis last decade, which blew up the global economy. This time, they will retain the riskiest stakes in the deals, unlike how Wall Street banks and other issuers shifted most of the dangers before the crisis. Seer Capital and Angel Oak prefer the term “nonprime” for lending that flirts with practices that used to be employed for debt known as subprime or Alt-A.”

    . . .

    “‘I go to conferences and no less than a dozen investors are saying they want these assets,’ said Michael Kime, chief operating officer of W.J. Bradley Mortgage Capital, a lender that started making some of the loans last year.”

    So “non-prime” not “subprime” and investors are clamoring for them. What could go wrong?

    • Jan 28, 2015 at 11:37 am

      I just did a radio interview on auto subprime. 31% of $1 trillion in auto loans are subprime. There is plenty of predatory behavior, with risks shuffled off via securitization. Evidence of fabricated info in loan documents…. DOJ, others are investigating.

      As long as Wall Street keeps getting bailed out, history will repeat itself.

      • NotSoSure
        Jan 28, 2015 at 6:59 pm

        Wolf, do you know who’s the most exposed to this? Presumably regional banks more than the big ones?

        • Wayne
          Jan 28, 2015 at 7:17 pm

          More about subprime issuers than banks, but this might help:

          U.S. Subprime Auto Loan ABS
          Tracker: June 2014 http://bit.ly/1v6Oohz

          Actually I’m not sure how involved banks and especially regional banks are in auto lending. Seems like most financing is routed through the auto dealers, so I suspect these issuers are the big lenders. Anybody know?

        • Jan 29, 2015 at 12:51 am

          The big ones: Ally, GM Financial, Ford Credit, Chrysler Capital, Santander (very aggressive with subprime, highest early delinquency rates), and the big banks. Now some smaller specialty subprime auto lenders have popped up that don’t fall under the banking regulatory regime. Regional banks play a smaller role.

          Total subprime auto-loan balances are about $300 billion. So it’s not comparable to the damage that housing subprime did.

          Securitization spreads the risk. These AAA-rated subprime bonds are creeping into bond mutual funds.

          Here is my most recent piece on that topic with more numbers and details:
          http://wolfstreet.com/2015/01/09/subprime-auto-loans-spike-sales-industry-in-denial-implosion-to-hit-broader-economy-more-than-banks/

  5. Julian the Apostate
    Jan 28, 2015 at 11:16 am

    Newspeak vs. oldspeak? Egad, let’s not confuse the issue with the facts! No Gentleman could be so..so..so vulgar! Mon Dieu!

Comments are closed.