Tags: Junk | Bonds | Crash | Credit | Markets

Junk Bonds Threaten to Crash Credit Markets

Tuesday, 16 Mar 2010 04:04 PM

By Dan Weil

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While the worry of the moment is sovereign debt default, that may soon shift to corporate debt default.

Starting in 2012, more than $700 billion in high-yield (junk) corporate debt will come due, and experts are concerned that a lot of that debt could turn sour.

Defaults and bankruptcies reportedly could be the result.

Even Moody’s Investors Service, which like the other major credit ratings agencies blessed almost any deal with a pulse as triple-A in the run-up to the financial crisis, has sounded the alarm.

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” Kevin Cassidy, a senior credit officer at Moody’s told The New York Times.

Much of the problem stems from leveraged buyouts executed at the height of the credit bubble frenzy in 2005-07.

Private equity firms would buy public companies, take them private and then saddle them with debt so that the firms could pull out cash dividends for themselves.

Then the idea would be to sell the company again before the debt bill became due.

Well that’s what happens in 2012, because bonds and loans issued to finance those transactions typically run for five to seven years.

The outlook is still bright for the short-term, says junk bond guru Martin Fridson.

“I think that the default rate will continue to decline during 2010,” he told Forbes magazine.

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