The past, present and future of junk bonds

Mon, 05 May 2008 06:59:58 -0400

There's been a good deal of debate about the role of junk bonds in the ongoing credit crunch. Martin Lipton says the junk bond is the fount of it all. A Financial Times columnist weighs in, seeming to agree more with Lipton. One of his points is that we still do not know whether the high-yield market is in a for a really nasty spell. What if a recession really kicks in? What if companies really start to default (unthinkable a few years ago)? For the moment, there seems to be a mild resurgence in the market. First-quarter volume ticked up a bit. But hey, as the column points out, at least the ratings of high-yield issues reflect the reality of the risk. Then again, there may be some bargains to be had in distressed credit beyond leveraged loans. We'll see.

For more:
- here's the Financial Time column

Can everyone be wrong?

Wed, 23 Apr 2008 06:59:59 -0400

Back when the subprime crisis had not fully bloomed, there were a few brave souls who were convinced--absolutely!--that the mortgage edice was about to crash. You can imagine the pitch meetings. They were likely derided as delusional. You can almost hear the argument: "So you mean to tell us that everyone is wrong? That this entire industry built up by the likes of Merrill Lynch and Lehman Brothers and Bear Stearns is all a house of cards?"

We all know the rest of the story. Now we see something else at work: the entire buyside seems to be rushing into distressed credit. Every brand name private equity firm is busy launching distressed credit funds. Hedge fund are even angling in. So is the herd headed toward a cliff again? Maybe, maybe not. Consider leveraged loans. Banks pretty much had to offload them for balance sheet purposes. But are any issuers set to default? Not likely. Some leveraged-up firms may suffer to be sure, but it's more likely that most will find a way.

Then again, we've heard that before.

- Jim