Companies Not Shying From Hard-To-Sell Junk Debt



Federal Reserve Bank of Dallas President Richard Fisher, a former managing partner of a fund that bought distressed debt, said in a speech last week that he'd "have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy."

Five years after the Fed started holding benchmark rates at about zero and pumping more than $3 trillion into the financial system to ignite growth, Fisher warned in the Jan. 14 remarks to the National Association of Corporate Directors that signs are emerging that Fed stimulus has made for "an intoxicating brew."

Even as the central bank starts slowing monthly bond purchases to $75 billion from $85 billion, yields on dollar-denominated speculative-grade bonds have fallen to 6.21 percent, 0.22 percentage point from the record low in May 2013, according to Bank of America Merrill Lynch index data.

The securities, which provide bigger cushions of extra yield over benchmark rates than higher-rated debt, are governed by idiosyncratic deal documents and aren't as frequently traded. While trading in speculative-grade bonds has risen, volumes have failed to keep pace with a market that's expanded 71 percent since 2008 as Wall Street's biggest banks reduce their holdings of riskier assets in the face of new regulations.

Speculative-grade, or junk, bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- at Standard & Poor's.

Investors are emboldened by a U.S. economy that will probably expand by 2.8 percent this year and 3 percent in 2015 from 1.9 percent in last year, according to a Bloomberg survey of 83 economists. High-yield bond funds have received $3.85 billion of deposits since the end of September, according to data compiled by Royal Bank of Scotland Group Plc, as investors gained conviction that the U.S. economic recovery was strengthening. The unemployment rate dropped to 6.7 percent by Dec. 31 from 10 percent in October 2009.

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"Money has found it very easy to flow into public, mainstream things," said Marks, Oaktree's chairman, in a Dec. 10 presentation for investors. "The best credit opportunities are in niche markets."

He said the firm is earning about 11.5 percent to extend loans to smaller companies, about twice as much as the yield on a junk bond of comparable quality.

These deals are small and "entirely illiquid," he said. "It requires a lot of due diligence."

Publicly traded business-development corporations, which lend to the smallest and riskiest companies, attracted $4.1 billion last year, the most since 2007, as the firms known as BDCs gained an average 16.4 percent. The firms are juicing returns by borrowing about 50 cents for every dollar raised from equity investors, up from 36 cents in 2011, according to data compiled by Keefe, Bruyette & Woods analysts.

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