Tuesday, January 06, 2009
Are the capital markets getting better?
In the day job, I get regular emails from the capital markets analysts at big banks and securities firms. The tone has improved considerably in the last few weeks, from absolutely farookin' dire to speculation that there is a light at the end of the tunnel, at least for businesses that want to issue high yield bonds. Here are excerpts from the last two emails -- December 22 and January 5 -- that I've gotten from one of the big banks:
December 22
As we head into the holidays, the tone in the high yield bond and loan market has improved modestly, with investors demonstrating a renewed willingness to participate in primary issues. While there are undoubtedly a number of challenges remaining in the debt capital markets and economy broadly, here are a couple of recent developments that provide encouragement and should support market access for several of our clients in January:
Recent High Yield Primary Issues Performing Well in Secondary Market - Two of the three high yield transactions completed during the fourth quarter – Kansas City Southern ... and El Paso ... – were priced within the last two weeks. Both of these transactions and the MGM offering completed earlier in the quarter ... are all trading well in the secondary market, with prices improved by three to six points (100 – 150 bps lower in yield) since issuance. We have long felt that successful initial secondary market performance was an important step in rebuilding investor confidence, and will continue to watch the performance of these issues closely.
High Yield Secondary Indices Improving - Our benchmark HY11 contract (a CDS proxy for the high yield market) improved by roughly four points this week, marking its best weekly performance in months. The contact’s current 77 bid price is the highest level in more than a month. As this CDS-based contract is more liquid than individual high yield securities, we consider its improvement an encouraging leading indicator for progressive improvement in high yield cash bonds.
Investment Grade Market Active on Increased Volume - Total investment grade issuance completed December of $107 billion already marks the third busiest month of the year, and a significant increase over total November volume of $41.5 billion. While approximately 80% of December issuance was by financial companies under the FDIC’s Temporary Liquidity Guarantee Program, more than $20 billion is attributable to traditional non-government guaranteed corporate issuance.
January 5
From the painful levels in late November & early December, the high yield market has continued to improve. While loan trading levels have not made as sharp a move back [see this segment of TigerHawk TV for the significance of the loan market - ed.], the overall tone of the market feels better now that it has in several months.
Here are a few data points: Since Dec 15, the HY11 is up 8 pts, LCDX is up 7 pts and more importantly, cash bonds are up 10-15 pts.
Recent new issues have continued to perform well. The new Kansas City Southern bonds are 101 (priced at 88.4), the new El Paso bonds are 101 (priced at 88.9) and the new MGM bonds are 97 (priced at 93).
High yield mutual funds have taken in over $1.4b of cash throughout December, which is the largest inflow since sept 2003. Also, we had over $70b of coupon income last year with only approximately $35-$40b of real new issues.
Needless to say, a lot of cash is on the sidelines.
From before Labor Day until mid-December, the capital markets, including for high yield bonds and new bank loans, were for all intents and purposes closed to new issuances. As I explained here and elsewhere, banks and bond investors will not lend as long as they can buy loans and bonds of creditworthy borrowers at a deep discount on the secondary market. The strengthening of the secondary market is, therefore, an essential prerequisite for the raising of new capital. If these favorable trends continue, eventually it will be possible to raise new money. When that starts to happen, you will actually hear the sighs of relief from American businesses.
4 Comments:
By 
Cardinalpark, at
Tue Jan 06, 08:42:00 AM:
ALl true, but beware...there is a likelihood of significanty increased high yield defaults in 2009. It strikes me as inconceivable that default rates will not increase (and rating agency downgrades) based upon expected earnings performance of companies in 2009. This is turn is likely to unleash significant secondary selling activity and high yield redemptions - thus disrupting the high yield capital markets.
Keep in mind that the cited financings were in the energy and power sector and were attractively priced. Very attractively priced. As always, if you bring a good company in a healthy sector which is recession resistant and price a deal right, you can get it done. the same would likely be true for a robust health care related business. But if you are in a sector facing declining results in the current environment, I would suggest that capital remains either unavailable or prohibitively expensive.
Tread carefully!
By Viking Kaj, at
Tue Jan 06, 09:05:00 AM:
The operative word here is "there is a lot of cash on the sidelines." With the Fed funds rate at close to zero and all that cash looking for higher yields, there are lots of bankers out there who are desperate to put a deal together.
BUT, the larger problem for the US economy is consumer spending. The cycle of debt financed consumer spending is largely what has been putting the "growth" in our economy for the last five to ten years. And this "engine" is neither likely to benefit from financing like this nor likely to recover soon.
High yield debt financing is not going to contribute much unless it somehow leads to a growth in employment or real income for a broader segment of the population. Kansas City Southern is a strong regional railroad and El Paso Corporation is an independent gas pipeline company, which are more like public utilities so I don't see large job growth coming from this sector. If these were high yield bond for companies that were actually making and selling thing like cars then I might be more excited. Unfortunately, we all know that GM and Ford have been having a few issues on the credit markets lately.
This looks to me like bankers who are chasing any deal they can get their hands on, and investors who are chasing higher yields on companies that are close to public utilities, rather than any sign of potential recovery. Financing like this continued through the great depression, without leading to substantial recovery in the economy as a whole.
By Viking Kaj, at
Tue Jan 06, 09:05:00 AM:
The operative word here is "there is a lot of cash on the sidelines." With the Fed funds rate at close to zero and all that cash looking for higher yields, there are lots of bankers out there who are desperate to put a deal together.
BUT, the larger problem for the US economy is consumer spending. The cycle of debt financed consumer spending is largely what has been putting the "growth" in our economy for the last five to ten years. And this "engine" is neither likely to benefit from financing like this nor likely to recover soon.
High yield debt financing is not going to contribute much unless it somehow leads to a growth in employment or real income for a broader segment of the population. Kansas City Southern is a strong regional railroad and El Paso Corporation is an independent gas pipeline company, which are more like public utilities so I don't see large job growth coming from this sector. If these were high yield bond for companies that were actually making and selling thing like cars then I might be more excited. Unfortunately, we all know that GM and Ford have been having a few issues on the credit markets lately.
This looks to me like bankers who are chasing any deal they can get their hands on, and investors who are chasing higher yields on companies that are close to public utilities, rather than any sign of potential recovery. Financing like this continued through the great depression, without leading to substantial recovery in the economy as a whole.
By Viking Kaj, at
Tue Jan 06, 09:12:00 AM:
Forgot add that Kansas City Southern owns the main cross border rail link to Sonora, so there is a good chance that part of this may be spent for infrastructure improvements south of the border.
Also, the recent drop in the Capital markets makes them look like geniuses for unloading Janus 5 years ago.
