Oct 10 - After trailing off in the spring and early summer,speculative-grade corporate bond issuance in the U.S. has rebounded handsomelyin September to the highest amount on record, to $34.9 billion, according to areport published today by Standard & Poor's Ratings Service, titled, "LowestRated U.S. Speculative-Grade Bond Issuance Enjoys The Most Favorable LendingEnvironment In History, But Buyers Need To Stay Mindful Of Risks." Prior toSeptember, the proportion of speculative-grade issuance among the higher ratings('BB+' to 'B') dominated the speculative-grade market. However, the proportionof new speculative-grade issuance in September in the lowest ratings ('B-' andbelow) hit a 12-month high of 37.7%.
"Fueling this increased issuance is the continuing falling yields paid out bycorporate borrowers over the course of 2012," said Diane Vazza, head ofStandard & Poor's Global Fixed Income Research. "Far from being the result ofincreased creditworthiness by corporate borrowers, this falloff in yield ismore a result of investors' search for return among available investmentavenues," Ms. Vazza added. This hunt for yield is also happening in Europe, asa result of ultra-low yields on government debt in most of the developedeconomies, forcing investors to look beyond the safest government debt.
However, while it may be tempting to pile money into the best alternative withregards to payout, the relative risks associated with speculative-gradeissuers - and in particular with the lower rated issuers - remains high.Default rates for issuers in the 'BB' rating category are indeed relativelylow historically, but the increases in default rates in the 'B' and 'CCC/C'categories are profound by comparison. Add to this, that the trailing 12-monthdefault rate for the 'CCC/C' rating category has been on the rise over thecourse of 2012, finishing Aug. 31 at 27.2%, indicative of increased stress onthis segment of the high-yield market.
Nonetheless, increased risk does appear to at least provide increased rewardsfor the savvy bond investor, with proper timing being crucial to investmentdecisions. Over the last seven quarters, returns on 'CCC' and lower ratedbonds hit a high of 7.9% in the first quarter of 2012, however, they dropped10.9% during the two quarters prior to that. Returns for the 'BB' and 'B'categories have been more muted over the same period, but they have alsoexperienced fewer and less severe periods of negative returns. Clearly thepotential payoffs to investing in the riskiest speculative-grade bonds can besubstantial, however, the potential losses through the combined effects ofquickly declining bond prices and elevated default rates within the lowestrated bond categories is just as pronounced. The rationale for moving intothis riskiest class of investments in a period marked by such low yields isunderstandable, but at this point in the high-yield credit cycle investing inthe broad market for the lowest-rated debt has become a very risky strategy.Informed credit selection is of the utmost importance heading into the fourthquarter of 2012.
The report is available to subscribers of RatingsDirect on the Global CreditPortal at
. If you are not a RatingsDirectsubscriber, you may purchase a copy of the report by calling (1) 212-438-7280or sending an e-mail to firstname.lastname@example.org. Ratingsinformation can also be found on Standard & Poor's public Web site by usingthe Ratings search box located in the left column at
Members of the media may request a copy of this report by contacting the mediarepresentative provided.
(New York Ratings Team)