Junk Bonds May Beat Loans To A Rebound
January 15, 2009
I wouldn’t want to call this too early, but it looks like the high yield bond primary is poised for a quicker recovery than its loan counterpart.
Certainly this suggestion comes with one hefty caveat—whether the thawing we’re seeing in the junk bond market qualifies as the beginning of a recovery. Or not.
For argument’s sake, let’s say it does. Indeed, two recent drive-by deals to hit the high yield primary—MetroPCS Wireless on Wednesday and CSC Holdings on Jan. 9—met with strong demand, causing the companies to significantly upsize their offerings.
Meanwhile, the loan primary remains, er … what is the technical term? Dead?
Which wouldn’t mean a thing to anybody who doesn’t follow these markets, but those of us who do know that leveraged loan issuance has dwarfed high yield bond issuance in recent years. At the height of the leveraged buyout boom in 2007, U.S. loan volume totaled $1.1 trillion for the year, while U.S. high yield bond volume totaled $137 billion, according to Thomson Reuters. So the idea that high yield issuers that need to tap the credit markets might well be turning to the bond market piques worthy interest.
I was curious why this might be the case, so I talked to Ty Anderson, the global head of high yield strategies at DB Advisors, Deutsche Bank’s institutional asset management business.
“There’s more technical dislocation in the buying community for loans than there is for bonds,” Anderson said. “That’s one reason why, for the same credit, it’s easier to come to market in the bond market and will be for the foreseeable short term.”
More specifically, the buyers that made it possible for the loan market to balloon the way it did—largely CLOs and hedge funds and other levered buyers of loans—have gone away. The CLO market is dormant. Leverage is essentially not available. And the dealers who used to have significant involvement, on the warehousing side as well as for their own proprietary books, are under balance sheet pressure to constrain their activity.
All of which means that if you are an investor in high yield bonds, the months to come may turn out to be quite profitable. Economic conditions appear likely to keep yields high for some time, so companies forced to come to market now are paying for the privilege. And if issuing bonds presents itself as their best option, then they’re paying those yields to junk bond investors.
On the flip side, loan investors, who had a deluge of offerings to choose from at a time when overwhelming demand drove yields down to practically nothing, may not get the same opportunity to take advantage of the beefy returns produced by today’s market conditions. At least not for the short term. And that is a tough break.
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