October 8, 2001
Corporate-Loan Market's Outlook Dims
As Sept. 11 Attacks Hurt Its Performance
By JATHON SAPSFORD and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
Fears of rising corporate defaults in the wake of the Sept. 11 attacks have hurt the performance of corporate loans as an investment, and a number of recent reports suggest the corporate-loan market may run into trouble in the months ahead.
Credit-rating agency Standard & Poor's, in a venture with the Loan Syndication and Trading Association, will release this week a new index of 500 key noninvestment-grade loans that shows the overall return on loans, as measured by both interest income and price, fell 1.52% during September.
That, say the publishers of the new index, is the biggest such fall since 1997 when S&P began storing data on the investment performance of loans. It's two times the decline of 0.74% that the index data show for the month after the 1998 Russian default crisis, or the 0.75% decline during the Asian crisis of 1999.
Over the past decade, corporate loans have become something like securities, changing hands among investors almost as easily as stocks or bonds. And like other securities, loans are now falling in value amid an uncertain economic environment. Investors are worried corporations will increasingly find themselves unable to repay their debts.
"There is a fear that default risk is now higher as a result of the attack," says Steve Miller, managing director of Standard & Poor's PMD, the unit publishing the new index. S&P is a unit of McGraw-Hill Cos.
In a sign of the recent volatility in the stock market, the new S&P index shows that loans held up better than many other investments, Mr. Miller noted. While the average return on loans fell 1.52% in September, the return on high-yield bonds during the same month fell by 6.42%, while stocks fell 8.08%. The difference is largely attributed to the fact that loans are "secured," or backed by collateral, and thus a more sound investment.
Yet the attacks came amid a slowing economy in which bad loans were already on the rise. In some industries, like technology, delinquencies were rising to crisis levels. The new S&P index shows that investors now see the loan market as only getting worse, a gloomy outlook supported by everything from a surge in downgrades to government warnings about deteriorating loan quality. It is also unclear what impact there will be from Sunday's bombing attacks by U.S. and British military forces on targets in Afghanistan.
Moody's Investors Service said Friday that in the first nine months of 2001, the agency downgraded five times as many borrowers as it upgraded, the most negative ratio since loan ratings were initiated in 1995.
Meantime, the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency underscored the concerns about the loan market on Friday with the release of an annual spring investigation into the quality of syndicated loans on the books of banks.
Loans classified during May and June 2001 as bad stood at $117 billion, or 5.7% of the total, the government review found. That's up from 3.2% for the year 2000.
Loan prices in some sectors are being hit harder than those in others, according to Loan Pricing Corp., which monitors prices in the loan market. The average price of leveraged loans to hotels and gambling companies, for example, climbed 1.1% from July 1 to Sept. 10 and dropped 4.7% from Sept. 11 to 28, according to the pricing data service. Construction company loans rose 0.9% prior to the attacks, then dropped 2.7%. Real-estate investment trust loans rose 0.2%, then fell 3.7%. Technology company loans climbed 5.2%, then dropped 3.3%.
Regulators have been worried that the attacks would prompt banks to rein in lending on businesses suffering as a direct result of the attacks. On Sept. 12, the Office of the Comptroller of the Currency released a statement encouraging national banks to "work with customers" affected by the attacks. The agency told banks to consider such alternatives as extending the terms of loan repayments, restructuring debt obligations, and easing credit terms for new loans to certain borrowers.
Two days later, a statement from the Federal Reserve urged banks to "take prudent steps to make credit available to sound borrowers, while taking into account current conditions in considering adjustments to the original terms and conditions of customers' loans or transactions." |
