Blackstone and Barclays on Credit Cycle

What does the boom in junk bond issuance mean? Is it a sign of credit market strength? Or is it the next bubble?

A report from Blackstone Group drew a somewhat somber picture, suggesting that high-yield financing and re-financing may defer rather than prevent distress at weaker and smaller companies.

About $1 trillion of high-yield and institutional leveraged loans are expected to mature from 2011 to 2015.  But companies have delayed the maturations. More than two-thirds of this year’s high-yield issuance was used to refinance debt—one of the highest refinancing rates in 15 years.

While the high-yield issuance appears to be a major contributor to  recovering capital markets, it is most likely setting the stage for the next cycle of company restructuring, according to Blackstone. The firm runs a restructuring business and acquired GSO Capital Partners, a $29 billion credit manager, in 2008. No doubt the managers watch the credit cycle for opportunities.

Another view, from Barclays Capital’s co-head of US credit strategy Jeff Meli, is that high-yield issuance becomes a concern only if growth declines. The flow of money to fixed income is very robust globally, he says. There is strong demand for bonds while the supply is shrinking.

All in all, the credit market is strong, Mr. Meli concludes, but low-rated debt is more sensitive to the macro environment and hence would be vulnerable if growth becomes anemic.  Not that it’s all that strong now.

Some firms may run into cash flow problems despite the refinance bonanza. If that becomes common, distressed debt managers will have plenty to invest in. But they were expecting that when the credit boom ended and it did not happen.

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