There are strange goings on in the markets these days. The latest catch 22 is the rally in junk bonds. Bloomberg reports that "The lowest rated companies that may not be able to afford avoiding bankruptcy and exchanging or buying back debt at the lowest prices on record." That is pushing the prices of junk bonds up in the biggest rally ever. The flip side is that this practice is the higher prices are crowding out some of the neediest companies
Here are some examples:
- The Blackstone Group LP (NYSE: BX) owns Freescale Semiconductor Inc. In March, Blackstone wiped away $1.9 billion of Freescale's debt by offering investors 32 cents on the dollar in loans. Since then the securities have tripled to 54.1 cents on the dollar. Now, the chip maker still has $7.5 billion of debt and would need to do it at much higher prices.
- There has been a record of 11 swaps of about $14 billion this year.
- Since March 9, CCC rated bonds or below have jumped 64%.
- The Merrill Lynch index of US CCC and Lower Rated securities rose to a high of 60 cents on the dollar.
- Such bonds yield an average of 20.5% or 18.4 percentage points more than treasuries.
- The lack of private Chapter 11 financing makes distressed sales all the more important to avoid bankruptcy.
- At least 35 companies have offered to exchange or repurchase bonds and loans this year, with ratings of CCC or lower.That compares with 15 last year and only 4 in 2007.
- Debt swaps work best when there are big discounts. However, it then is almost impossible for a company to obtain further borrowing from a bank.
So then, what we are seeing is a mad scramble by companies with CCC rated and below bonds to exchange their bonds for unsecured loans for the most part. This caused a rally in the junk bond market. Now, though, there are many companies in the wings that are on their last legs and are finding it difficult to do the same swaps because of the high prices.
Have you ever speculated in the junk bond market?
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