That Which Does Not Kill Us...

Finish the infamous Friedrich Nietzsche quote as you wish with regards to 2008 and the future of the high yield loan and bond markets. That which does not kill us …makes us more transparent …eliminates excessive risk …promises higher yields.

All good things for investors, a slender silver lining, if you will, on what has been the worst year in leveraged finance ever. Now, heading into 2009, the question remains: When will you guys take the plunge back in?

We all know how nasty it has been, how investors have tripped and fallen trying to find their footing on a slippery bottom. Fear has a stranglehold so tight on the market that investors have begun paying simply for safety.

This week the yield on four-week Treasury notes fell to 0%. And some reported three-month Treasurys sold at negative yields of 0.01% and 0.02%. Yes, negative yields. A small loss in return for protection from the storm.

This goes beyond fear. This is madness.

I realize, of course, how low the economy has sunk, and the effect this is having on high yield companies, on retailers and restaurants and the beleaguered auto industry. More defaults and bankruptcies loom, no question.

But, come on. Nobody believes good deals don’t exist on the high yield loan and bond markets. Yields have reached ridiculously high levels. The spread over Treasurys on the Merrill Lynch U.S. High Yield Master II Index recently crept above 2000. 2000! And last week, investors in El Paso Corp.’s $500 million bond offering, the first junk issuance in six weeks, walked away with a 15.25% yield. A double-B-rated natural gas company paying 15.25%—seems like a pretty decent deal to me.

The good news there is, according to a source familiar with the transaction, buyers were largely traditional, long-term high yield players, and he described the deal as being two to three times oversubscribed, with much of the interest coming from reverse inquiry, or investors looking for something to buy.

And this says to me that maybe investors are ready to jump in if the deal feels right. Hopefully, many have simply decided to cut their loses for the year and try to ride it out until 2009 without losing more. Maybe, everybody’s just sitting tight, waiting for someone else to leap first. But somebody has got to go first.

So with the holiday season upon us, I will leave you with these words: Happy Holidays. And when January rolls around, go forth and buy.

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