Tags: Junk | Bond | Woes | Hurt | U.S. | Economy

Junk Bond Woes Hurt U.S. Economy

Tuesday, 26 April 2005 12:00 AM

The junk bond market appears to have taken the worst hit.

Companies have been forced to suspend sales of high-yield, high-risk debt in the wake of a bear junk bond market that is at its worst levels since 2002.

And that's also bad for the wider economy. Junk bonds are the driving force behind many emerging and expanding companies. Without the fresh capital, where will money for expansion come from?
 
This problem has led companies to seek alternative financing for expenses ranging from construction ventures to the purchase of new businesses.

And new capital inflow from venture capitalists is weakening as well. On Tuesday, CBS Marketwatch reported that venture capital investing dipped 15% during the first quarter but stayed roughly on par with its post-Dot-Com range since mid-2002.

While the news is not entirely bad, for market watchers it's a clear sign that a raging bull is not in the immediate future.

Now back to junk bonds.

According to Bloomberg, companies like satellite TV operator DIRECTV Group, Inc. and tobacco processor Dimon, Inc. have postponed more than $3 billion in transactions since the middle of March, when General Motors slashed its annual profit forecast.
 
And junk bond sales have fallen 68%, to $227 million a day, while companies posing the most risk now incur an average 1.25% charge to borrow money ($1.25 million for every $100 million loaned.)
 
According to Fitch Ratings, approximately $12.2 billion in junk bonds will come due by the end of this quarter. Chiquita Brands International Inc., the world's largest banana producer, is just one company expected to dump its high-yield, high-risk debt very soon.
 
"This is not a good time to be in the market," says Cheniere Energy, Inc. Chief Executive Charif Souki.

His company just retracted a $500 million issue to subsidize construction of natural gas terminals in Texas and Louisiana. There was no word on when the transaction would resume.

2. Commodity 'Bubble' Could Signal Inflation Peak
 
Goldman Sachs analysts touched off a crude oil price spike with their announcement that oil could eventually reach $105 a barrel.
 
Some compared the declaration to the late 1998 forecast from analyst Henry Blodget, who claimed at the time that Amazon.com would hit $400 a share.
 
His forecast was accurate -- but the stock then tumbled 80% over the next couple of years, marking the death of the technology bubble.
 
The Goldman forecast "does typically mark the euphoria that's seen at market extremes," says Larry Berman, chief technical strategist at CIBC World Markets.
 
On the heels of a two-year oil and steel commodity surge, analysts say prices could be nearing a peak. They cite a U.S. slowdown, which might stifle the resource boom fed by China.
 
This hypothesis calls conventional wisdom into question as many wonder whether inflationary pressures will see the Fed continue raising interest rates through 2005.

3. Big Business Worried About Bush Private Pension Proposal
 
There is a clash brewing between old friends President Bush and big businesses like General Motors Corp., DuPont Co. and Delta Air Lines, Inc.
 
And Bush's proposed pension plans are the cause.
 
These financial giants are among companies lobbying against the president's idea to restructure the national pension-insurance program. They contend that his plan could damage or even destroy their private retirement systems and even bankrupt some employers.
 
The Bush administration is asking employers to supply another $18.1 billion in premiums to the Pension Benefit Guaranty Corp., the quasi-government branch that backs corporate pensions.
 
Companies would also be asked to revalue their pension liabilities and completely fund any defined-benefit retirement programs.
 
According to the U.S. Labor Department, employee pensions were  underfunded by $450 billion in 2004.
 
"It would be devastating for the system to raise that much money" in premiums, says Annette Guarisco, an executive at GM, whose pension plan is the largest in the United States.
 
"For all companies, it would require an unnecessary diversion of funds from normal business operations, research and development, product development."

Financial Intelligence Report has warned that the first cracks of the Baby Boomer Crisis are already being felt -- as countless Boomers retire well before the first wave hits 65 in 2010.

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The junk bond market appears to have taken the worst hit. Companies have been forced to suspend sales of high-yield, high-risk debt in the wake of a bear junk bond market that is at its worst levels since 2002.And that's also bad for the wider economy. Junk bonds are the...
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2005-00-26
Tuesday, 26 April 2005 12:00 AM
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