Apocalpyse 2: junk bond avalanche looms for credit markets
When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster.business Updated: Mar 16, 2010 22:24 IST
When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster.
Maybe they should have, because 2012 is also the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that could well overload the debt markets.
With huge bills about to hit corporations and the federal government around the same time, the worry is some firms will have trouble getting new loans, spurring defaults and a wave of bankruptcies.
The US government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.
Even Moody’s, known for sober public statements, is sounding the alarm.
“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.
Private equity firms and many non-financial companies were able to borrow on easy terms until the credit crisis hit in 2007. The record number of bonds and loans that were issued to finance those transactions typically come due in five to seven years, said Diane Vazza, head of global fixed-income research at Standard & Poor's.
The credit markets have gradually returned to normal since the financial crisis, but the issue is whether they can absorb the coming surge in demand for credit.
From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.
Involved are a Who's Who of private equity firms and the now highly-leveraged companies they helped buy in the pre-crisis boom years.
Hospital owner HCA was taken private in 2006 and has $13.3 billion in debt payments coming due between 2012 and 2014.
For Giant Texas utility TXU, $20.9 billion needs to be refinanced in the same time.
Not everyone is convinced that 2012 will spell catastrophe for the junk bond market.
Optimists like Martin Fridson, a veteran high-yield strategist, note that investors seeking high yields do snap up speculative-grade bonds, which will allow companies to refinance before their loans come due.
The problem is that they will be competing with a raft of better-rated borrowers expected to seek buyers of their debt at around the same time.
Chief among those is the best-rated borrower of all: the US government.
The Treasury Department estimates the Federal budget deficit in 2012 will total $974 billion. Washington will have to borrow $1.8 trillion in 2012, because $859 billion in old bonds will come due and have to be refinanced, in addition to the deficit. By 2013 and 2014, $1.4 trillion will have to be raised annually.
Next in line are companies with investment-grade credit ratings. They must refinance $1.2 trillion in loans between 2012 and 2014, including $526 billion in 2012. Finally, there is the looming rollover of commercial mortgage-backed securities, which will double in the next three years, hitting $59.7 billion in 2012.
Even if most of the debt does get refinanced, companies may have to pay more, if heavy government borrowing causes rates for all borrowers to rise.
“These are huge numbers," said Tom Atteberry, who manages $5.6 billion in bonds for First Pacific Advisors, and is particularly alarmed by Washington's borrowing. "Other players will get crowded out or have to pay significantly more, because the government is borrowing so much.”