Cracks In Junk-Bond Market Form As BofA Sees Outlook Darkening

Nine Defaults

Not all investors are convinced that it’s time to dump the debt.

“At some point the day of reckoning is coming for the high-yield market, but that could be a few years away,” said Bonnie Baha, who helps manage $73 billion as the director of global developed credit at Jeffrey Gundlach’s DoubleLine Capital in Los Angeles.

She said there’s “no inflation in the system” to justify the Fed raising interest rates this year.

Even if rates do rise this year, Goldman Sachs Group Inc. sees junk-rated issuers able to withstand the move after they took advantage of cheap borrowing costs to push out maturities. About 64 percent of the outstanding debt doesn’t come due until 2019 or later, analysts led by Bridget Bartlett wrote in a June 30 note to clients.

More companies are facing restructurings after the cost of a barrel of oil plummeted by nearly half and iron ore fell by a third in the past year. Nine U.S. junk-rated borrowers defaulted in May, the most since October 2009, as depressed prices plagued the energy, metal and mining issuers that represent the largest contingent of debt from the riskiest companies, according to Fitch Ratings.

Overheated Markets

“High yield doesn’t look too compelling, and they are facing the risk of more losses from falling commodities, which have been crushed,” GAM’s Flaherty said.

Debt levels at U.S. speculative-grade companies are 4.7 times earnings, the highest they’ve ever been, according to Bank of America. So far this year, credit rater Standard & Poor’s has downgraded 224 companies versus 126, the worst ratio of upgrades to downgrades since 2009, according to data compiled by Bloomberg.

Markets are “extremely overheated,” particularly U.S. speculative-grade corporate bonds, billionaire investor Carl Icahn wrote on on his verified Twitter account Wednesday.

“If more respected investors had warned about the market in ’07,” Icahn wrote in a post, “we might have avoided the crisis in ’08.”