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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (44387)	10/27/2005 4:09:28 PM
From: ild	Respond to of 110194

=DJ Cautious Corporate Bond Investors Harder To Please By Aparajita Saha-Bubna and Tom Sullivan Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--It's increasingly difficult to woo corporate bond investors these days. Turned off by weakening bond prices, skimpy returns amid rising interest rates and shareholder favoritism by corporate borrowers, bondholders are increasingly content to sit on the sidelines. Adding to investor caution is the ongoing problems at corporate bond heavyweights Ford Motor Co. (F) and General Motors Corp. (GM). Auto bonds suffered a further dent Thursday on news that GM received subpoenas from the Securities and Exchange Commission regarding the SEC's ongoing inquiry of accounting practices at the beleaguered auto maker. "When the market trades off on old news, it's a negative sentiment indicator," said Tom Murphy, head of investment-grade corporate bonds at RiverSource Investments in Minneapolis, with around $100 billion in fixed-income assets under management. Even the $1 billion offering on Wednesday by investment-grade-rated Ford Motor Credit Co., the finance arm of junk-rated Ford Motor, saw only moderate demand despite its generous terms - which were in line with those typically offered by borrowers steeped in speculative-grade, or junk, rankings. The value of its 8.625% bonds due 2010 drifted lower in the secondary market on Thursday - a discouraging sign for bondholders. "There is clearly a greater selectivity in the type of risks credit investors are prepared to take via the primary market," said Edward B. Marrinan, director of credit strategy at JPMorgan Securities in New York. "This risk aversion has made the placement of new issues in higher risk sectors a much more difficult exercise than only a few months ago." Bondholders are also weighed down by concern over interest rates heightened by the pending change at the helm of the Federal Reserve. President George W. Bush on Monday nominated Ben Bernanke to succeed Alan Greenspan. Investors worry that monetary policy-makers may start to act more aggressively to contain inflation. Rising interest rates generally bode ill for existing bonds, causing a drop in their values because investors would rather own newer bonds with higher interest rates. Yet, there is also competing concern that the new leadership may have a more sanguine take on inflation. Inflation hurts bond values, making them less attractive, by taking a bite out of fixed-coupon returns over time. "Many yield-oriented investors are sitting on cash waiting to see how the Fed interest rate campaign plays out," said Murphy at RiverSource Investments. These concerns come at a time when bondholders are already fretting over the quickened pace of leveraged buy- out activities and shareholder-friendly moves by corporate debt issuers. Typically, bond investors dread leveraged buy-outs - in which private equity groups snap up undervalued companies, often with a generous helping of debt - as they may jeopardize the claims of pre-existing bondholders. Shareholder-friendly measures, such as stock buybacks and dividend pay outs, usually erode the value of a company's bonds, as they can pile up debt and endanger companies' credit ratings. Exemplifying the trend is chemical company DuPont Co. (DD), which saw its credit ratings slip earlier this week following news of a $5 billion stock buyback. All three major credit ratings agencies - Standard & Poor's, Fitch Ratings and Moody's Investors Service - sliced the long-term senior debt ratings of the Wilmington, Del. company by two notches to single-A. High-Yield Market Struggling Too New deals in the speculative-grade corporate bond market have also struggled. Month-to-date, just under $2 billion of new issuance has priced, compared with $10.1 billion in September and just under $7 billion in October 2004, according to data provider Thomson Financial. On Wednesday, Roundy's Supermarket Inc. (RDY.XX) shelved a $175 million issue that had already been cut in size from an originally planned $350 million. Proceeds were slated to be used to pay a dividend to its private equity sponsors - a purpose frowned upon by some money managers who prefer to see their investments used to grow a company's business. Many highly speculative triple-C-rated deals have been pulled while offerings that do get priced have usually been sold at the high end of guidance, said Eric Tutterow, senior director of high-yield corporate finance at Fitch. That's due in part to concern about economic growth stemming from disappointing third quarter earnings. In addition, the U.S. default rate - the bane of the junk bond market - spiked higher in the third quarter. The trailing 12-month default rate ended September was at 1.8%, up from 1.1% in June - driven primarily by fallen angels, companies that were formerly investment grade that filed for bankruptcy, including Delta Air Lines (DALRQ) and Northwest Airlines (NWAC), according to Fitch. Through the third week of October, which included the bankruptcy of another fallen angel, Delphi Corp. (DPHIQ), the trailing 12-month default rate jumped to 2.1% - a significant increase even though the rate remains historically low.