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Credit Markets Are Looser
Old 09-20-2012, 12:10 PM   #1
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Credit Markets Are Looser

..than a $2 'ho.

I have been watching tons of investment grade and junk issuers pretty much form a mob to issue tons of new debt for refinancing and other purposes. I thought it was bad when I started seeing new bonds issued by CCC-rated companies. Now this:

"AdvancePierre Foods is said to have been in the market today with a new syndicated loan which is of the "covenant lite" variety. This debt apparently was priced at 4.75% over LIBOR with a 1.25% LIBOR floor (all in yield of 6%) that matures in 4 and 3/8 years. This $825MM issuance has little or no covenant protections for the investors buying the loan, so the management of this privately-held leveraged buyout company can do pretty much what they want as long as they make the contractually scheduled payments on this loan. The proceeds paid off existing loans, but they also funded a dividend to the owner of the company. So a B-rated issuer was able to sell close to $1Bn in loans that have almost no protections for the investors and they were allowed to pay out a chunk of the lenders' money to the equity investors. For all of this lattitude they will pay a 6% yield. This is a pretty aggressive structure, and if we see more issuance like this and possibly some spillover from the leveraged loan market to the junk bond market, it will be a very clear sign that investors should resist the temptation of yield and get out of the junk market."

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Old 09-20-2012, 12:15 PM   #2
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I think investors are so desperate for yield that marginal credit risks are coming out of the woodwork to find people willing to lend at rates they could only dream about years ago. And people are desperate enough for yield that many will consider risks they would have firmly avoided five years ago.
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Old 09-20-2012, 12:25 PM   #3
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I think investors are so desperate for yield that marginal credit risks are coming out of the woodwork to find people willing to lend at rates they could only dream about years ago. And people are desperate enough for yield that many will consider risks they would have firmly avoided five years ago.

I don't disagree, but anyone holding junk bond funds and the like should be watching this stuff carefully and start thinking about an exit point.
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Old 09-20-2012, 12:26 PM   #4
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Man, I wanted to extend my HELOC period but the company wanted 4% to 7% interest and 70% loan-to-value. My current terms are 2.5% and 80% LTV. The mortgage refi didn't like the HELOC because the remaining loan period was less than 5 years and had a balloon payment end. The HELOC probably had over 5 years remaining when I did the 2009 refi. Credit looks a little tighter for me. Maybe I need to start a company.
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Old 09-20-2012, 03:08 PM   #5
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...pile it on!

Must be time to start shorting dividend ETFs, too.

Crazy frothy.

Dividend ETFs Rake in $2 Billion in Third Quarter | ETF Trends

ETA: blah, maybe no good deals out there, right now, already priced in.

-CC
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Old 09-20-2012, 09:00 PM   #6
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I don't disagree, but anyone holding junk bond funds and the like should be watching this stuff carefully and start thinking about an exit point.
This reminds me of the search for yield in 2006-07 and the covenant lite PIK loans that were popular back then. I see bad things in store for these lenders.
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Old 09-20-2012, 10:07 PM   #7
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This reminds me of the search for yield in 2006-07 and the covenant lite PIK loans that were popular back then. I see bad things in store for these lenders.
We aren't quite to that level of madness, but the issuance of a sizable cov lite deal is an ominous sign.
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Old 09-20-2012, 10:42 PM   #8
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I don't disagree, but anyone holding junk bond funds and the like should be watching this stuff carefully and start thinking about an exit point.
Any suggestions on determining an exit point? I'm actually pretty heavily weighted in junk bond funds (Vanguard & Fidelity - fairly good grade 'junk').

The yield has been great, the NAV has been good (positive for me), and I weight them as half equities half bonds in my AA. But I know this is a party that may not last. Just not sure when to lighten up, or what to move to (split to 'regular' bond and equity funds?), and would that be better overall?

My stupid-simple view would be to get out when NAV drops to my entrance point. That way, I know I captured the yield for all those years. But that doesn't really seem to make any sense to me, seems arbitrary.

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Old 09-21-2012, 04:15 PM   #9
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This trend is giving junk a bad name - junk is getting junkier. Watch out too for money market funds. Some getting very close to "break the buck" time. Those flush with cash would do well to seek FDIC coverage.
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Old 09-21-2012, 06:20 PM   #10
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Watch the leveraged loan index. When it hits par or better, time to start unloading for sure.
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Old 09-21-2012, 08:10 PM   #11
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Watch the leveraged loan index. When it hits par or better, time to start unloading for sure.
Link for those who are interested. 100 is par.

S&P/LSTA U.S. Leveraged Loan 100 Index (Price) Analysis - SPBDLLB - Bloomberg
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Old 09-21-2012, 09:01 PM   #12
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...pile it on!

Must be time to start shorting dividend ETFs, too.

Crazy frothy.

Dividend ETFs Rake in $2 Billion in Third Quarter | ETF Trends

ETA: blah, maybe no good deals out there, right now, already priced in.

-CC
I don't have any high yield funds. Everything is somewhat interconnected so it is good to stay alert. Good thread.
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Old 09-23-2012, 07:05 AM   #13
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This is a good thread. I need some hand holding on stuff like this.
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Old 09-23-2012, 07:59 AM   #14
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This is a good thread. I need some hand holding on stuff like this.
I think we all remember what happened a couple years after the last time that Brewer was alarmed by a market sector... like mortgages in 2006.
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