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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: HairBall who wrote (31381)	10/12/1998 11:41:00 PM
From: N	Respond to of 94695

More bad (good) tidings depending on your point of view.... Corporate bond market hits low London ft 10/12/98 By Edward Luce, Capital Markets Editor The US corporate bond market is suffering its worst downturn since the early 1980s. With US companies relying more heavily than those in Europe on bonds rather than bank loans to raise capital, analysts fear the credit contraction will feed more quickly into the real economy through defaults and possible bankruptcies. "In Europe, companies still borrow mostly from banks and they have bank relationships to fall back on at times like this," says one US banker in New York. "For many com-panies in the US, it is the bond markets or nothing." Almost 70 per cent of corporate borrowing in the US is through the domestic bond markets with the rest in conventional loans. In Europe, these proportions are reversed. In addition, less credit-worthy US companies rely even more heavily on the high-yield, or junk, bond market. Some investment-grade com-panies (rated BBB minus or above) have tapped the US bond markets - notably Proctor & Gamble, Campbell Soup and Ford Credit. For most high-yield companies, that is no longer an option. "Unlike in Europe, the US bond market is open at the margins for some companies," says Kevin Kelly, head of the bond syndicate desk at Goldman Sachs, New York. "But the broader market is as bad as any of us can remember." However, bankers say the high-yield market is not yet back to levels reached in the aftermath of the collapse in 1989 of Drexel Burnham Lambert, the bank that specialised in high-yield bonds. The rate of default on US high-yield bonds was running at 10 per cent in the early 1990s with $20bn of bonds affected. Today, the default rate is hovering around 3 per cent but creeping higher. The most vulnerable US borrowers include media and telecoms groups, which account for about 30 per cent of the $450bn US high-yield market. Analysts say many US companies will be hampered by the fact they cannot draw on credit lines with commercial banks to fill the gap vacated by jittery bond investors. Banks tend to mark down the value of loans much more slowly than the market downgrades bonds. This means borrowers with access to bank credit have an additional cushion against the worst effects of a credit contraction. However, companies in Europe, where the high-yield market is still less than $10bn in total volume, are expected to pay heavily for access to fresh bank credit. "Loans are getting shorter [in maturity] and much more expensive in Europe right now," says Karl Bergqwist, head of fixed income credit research at HSBC Markets. "Many banks will only extend loans on condition they are refinanced in the bond markets as soon as conditions allow." Therefore, the turmoil could persuade European banks to push their customers into the bond markets at a faster rate than had been expected.