Bank of America: Junk Bond Defaults Could Surge

Thursday, 25 Feb 2010 06:03 PM

By Dan Weil

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The junk bond market could be in for big trouble, as more than $600 billion of high-yield bonds and loans come due starting in 2012, says Bank of America Merrill Lynch.

“While the wall-shaped schedule of future maturities is nothing new for the high-yield issuer universe, it is more front-loaded today,” Bank of America analysts Oleg Melentyev and Mike Cho wrote in a note to clients obtained by Bloomberg.

“This could result in additional default pressures further down the road, as issuers deal with a higher concentration of maturities than they what they have been dealing with in the past.”

Junk bonds returned a record 57.5 percent last year, and many experts warned the move was overdone.

Almost 90 percent of high-yield loans outstanding mature in the next five years, compared with an average of 36 percent between 2005 and 2009, according to the report.

That’s because companies have shortened their loan maturities to a range of three-five years.

Debt maturities constitute “a point of particular concern in our view, given that primary loan issuance remains challenged by declining bank lending,” the analysts wrote.

Don’t count Pimco among the junk bond bears. It says junk bond returns could hit low double digits this year.

"We believe investors can capture attractive yields and excess spread in the high-yield market with relatively low default risk," Andrew Jessop, a high-yield portfolio manager, wrote on Pimco’s Web site.

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