Greece is thousands of miles away. But the debt crisis of that country and others in the Euro-region have had implications for companies big and small here – especially those with low credit ratings. These companies have been unable to borrow money, either from banks or the public debt markets, because of the renewed concerns of leverage. Investors and banks worry about a borrowers ability to repay principal and make interest payments.
The chart above, which accompanies a story by Jodi Xu on Dow Jones Newswires, shows the drop off in issuance of new loans and bonds in the below-investment grade arena. As Xu noted in her story, just when confidence was returning to the markets earlier this year, along came the Greek debt concerns and the ripple effect touched here – even for companies with no link to what was going on in Greece.
Here’s a mind boggling stat: April has become the second highest month ever in terms of junk bond issuance with $31.8 billion of bonds sold. And pushing that volume was refinancing, not M&A activity, which is usually the case behinmd high issuance months. Newswire reporter Michael Aneiro notes that at the beginning of 2009, as the financial crisis was fully taking hold, junk bonds on average were trading around 61 cents on the dollar. Today, that average price is 99.5 cents.
As President Obama detailed the stark realities of what’s needed for the survival of two of the U.S.’s largest automakers, stock markets around the world reacted. Investors were concerned about the broad economic ramifications and what this somewhat stand back approach might mean for banks – would he suggest they should/could fail as well? One market remained rather calm – the debt markets for GM’s bonds. People who own and trade bonds, especially corporate bonds, often do very deep analysis of what a company is worth. In most cases there is no question that when an investor lends a company money, that investor will get his/her principal returned with interest for having made that loan. In other words, the company is worth $1 for every $1 you lent. But that’s not the case with distressed debt trading like GM’s bonds, where investors bet on recovery valued. What do they think GM is worth in a bankruptcy scenario?
The long-awaited plan by Treasury on how to deal with those troubled assets sitting on banks’ books was revealed today – and one of the things we learned is that they now have a new name. Those of us in the media and elsewhere have taken a real liking to calling those packages of bum subprime mortgages, crappy commercial mortgages and other bad corporate loans, simply “toxic assets.” You have to admit, with that kind of a name, you sort of know what you are dealing with. But Treasury has a new name for them: “legacy assets” and “legacy securities.” It kind of reminds me of the good old days back in the 1980s when I was writing about the bonds being underwritten by Drexel Burnham for its often less-than-stellar corporate credits, including the corporate raiders. Drexel liked to call them “below investment grade.” The rest of us called them “junk bonds.” Today, they remain known as junk bonds. And I have a feeling that will be the same with toxic assets.
General Electric’s stock came under assault again today and once again, not because there was any news about the company. Instead, it appears that investors remain very nervous about its exposure to commercial real estate and the weakening economies of Eastern Europe. True, it significantly cut its dividend last week, from 31 cents a share to a dime. And in all likelihood, the major credit ratings agencies will drop GE’s pristine rating from AAA status.
