Time To Play "You Think You Got It Bad..."
September 11, 2008
Brace yourself for the spectacular risk I’m about to take—I’m going to guess, right here, right now, that you’ve read all you want about our friends Fannie, Freddie and the Lehman brothers. As glued to their sagas as you’ve been, I expect that another story about Monday’s sweet moment of hope followed by Tuesday’s brutal pillaging of it might drive you to snatch up a bottle.
I do not wish to be responsible for this. So instead, I thought we’d play a game. One I often play when my life slips into the proverbial toilet, a game that involves taking a look around and finding others who are worse off than you. It’s wildly uplifting, though I must warn you that following the rules is paramount to success—you must only make comparisons to those worse off than you. Comparisons to those better off have an entirely different effect.
For today’s round, I’ve found just the poor sap we lovers of the U.S. high yield loan and bond markets need to add a little joy to our day: The European high yield bond market. What a crapper it’s slipped into! You think the U.S. junk bond primary looks thin? Europe’s only had two new high yield issues all year. Two! And those were small private placements.
Moreover, our friends at Bloomberg reported today that more than 30% of European junk bonds are now trading at distressed levels, the biggest proportion in five years. By comparison, the number of U.S. speculative-grade companies trading at distressed levels was a mear 24.8% in August, according to Standard & Poor’s.
The European market, after being shutdown for more than a year, is now focused on a coming wave of debt issuance stemming from corporate refinancing, which is expected to push spreads there even wider. Investors are now demanding an extra yield of more than 10% over government debt to hold 53 of the 169 bonds in Merrill Lynch’s Euro High Yield Constrained Index, according to Bloomberg.
Among those that sold bonds when the high yield market was active in the first half of 2007, bonds from Norske Skogindustrier, the world’s second-largest newsprint maker, are trading at a spread of 1,016 bps over government debt, according to RBS, while those of car rental company Europcar Group stand at 1,441 bps. And European market watchers only expect things to get worse.
Now, don’t you feel better? How about a little chant to bring those feelings of sweet superiority on home. U.S.A! U.S.A! U.S.A!
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