Geithner The Bond Angel – US-FOREX.US
Has the credit crisis passed? Companies sold a record 1.79 billion in bonds worldwide in the first half of the year, according to a recent analysis by the rating agency Standard & Poor’s. Investors have clearly developed an appetite for corporate debt even while some companies, like the CIT Group, struggle under their debt burdens. Here’s the wrinkle: a third of that 1.79 trillion has government backing. In the U.S., the Federal Deposit Insurance Corp. guaranteed 160 billion through its Temporary Liquidity Guarantee Program of the 595 billion in corporate bonds sold through June. The largest beneficiaries of the effort to support financial firms’ debt were Citigroup
, General Electric Capital Corp
and Bank of America
. The TLGP expires Oct. 31. Unless the program is extended, financial companies will have to go it alone. Outside of financial firms, however, investment-grade corporations have unfettered access to the bond market, says Diane Vazza, head of global fixed income research at S&P. Aircraft maker Boeing
Co., for instance, sold 1.95 billion in bonds on Thursday. So the question is really how Citigroup, Bank of America and other banks will fare without Uncle Sam’s help. General Electric
could be a test case. GE said it would stop using FDIC backing for short-term debt and restrict using it for longer-dated bonds. Another boost to bond sales comes from retail investors who continue to shift their savings into bond funds. The easiest place to put new cash is into newly issued bonds, portfolio managers say, because secondary trading is less liquid and more costly. Taxable bond funds received 6 billion in the week ending July 15, according to the Investment Company Institute. For bond buyers, the risk remains from more speculative-grade companies missing debt payments. S&P’s trailing 12-month default rate for the U.S. is now 9.25%. Some companies default because they simply run out of cash. Others default in an attempt to survive through bond exchanges, asking bondholders to help them shed debt by swapping their bonds for other debt or cash at a discount.
In the past week, the beleaguered lender CIT launched an offer to pay holders of 1 billion in notes coming due in August 775 for every 1,000 in principal payments, with an extra 50 for those who tender their bonds early. If it fails, the company says it may file for bankruptcy. A successful exchange could save CIT more than 200 million, but it warned that it may still file for bankruptcy .
Some think the dangers of a rising default rate are overblown. Gary Sullivan, head of high yield bond portfolio management at Deutsche Bank’s DWS Investments, recently said he expects the default rate to increase but not as high as 14%, what S&P forecasts for early next year. Certain bond buyers say they can study balance sheets to find companies with risky credit profiles that will survive a recession and pay a high yield. Sullivan favors health-care, cable and telecom companies and bonds with ratings of B and BB, near the top of the junk range. He’s even willing to pick through companies with CCC ratings, those with the greatest debt burdens and most likely to default .