Bond Bore Blog
Kodak Bankruptcy (Junk Bonds)
Kodak filed for Chapter 11 Bankruptcy on January 19 2012. The WSJ writes:
The storied former blue chip said it had secured $950 million in financing from Citigroup Inc. to help keep it afloat during bankruptcy proceedings. The company also named Dominic Di Napoli, a vice chairman at FTI Consulting Inc., as its chief restructuring officer to help steer the company through bankruptcy court.
The bond market shows the following prices:
Posted by Bond Bore at 08:56 2012-01-19 | Trackbacks (0) | Comments (0)
More Kodak (Junk Bonds)
Bloomberg's has an article that says:
The creditors hold second-lien debt backed by Kodak’s patent portfolio and want the company to use cash from an asset sale to pay bondholders before pouring proceeds back into money- losing operations, said the people, who asked not to be named because the talks are private.The piece doesn't indicate whether the second lien debt is long term or short term. Kodak's most recent balance sheet shows $1.4 billion in long term debt. The current outstanding bond principle stands at $1.2 billion. EK also lists $543 million in "Other long term obligations." Bloomberg doesn't mention it, but there is 2.6 billion in pension liabilities on Kodak's balance sheet. If the debt holders succeed in forcing a bankruptcy, presumably those people would suffer. NPR has a piece on the impact to retirees if the company does enter bankruptcy.
Posted by Bond Bore at 12:55 2011-10-12 | Trackbacks (0) | Comments (0)
Bond Default Rate (Economics)
One of the most critical factors a bond investor has to consider when deciding on a bond investment is whether the bond will default. The market's expectation of whether a bond will default is what determines the bond's price (and yield) in the market. The Municipal Bond Fairness Act actually contains historical data for bond default rates show in this table:
| Moody's | S & P | |||
| Muni | Corp | Muni | Corp | |
| Aaa/AAA | 0.00 | 0.52 | 0.00 | 0.60 |
| Aa/AA | 0.06 | 0.52 | 0.00 | 1.50 |
| A/A | 0.03 | 1.29 | 0.23 | 2.91 |
| Baa/BBB | 0.13 | 4.64 | 0.32 | 10.29 |
| Ba/BB | 2.65 | 19.12 | 1.74 | 29.93 |
| B/B | 11.86 | 43.34 | 8.48 | 53.72 |
| Caa-C/CCC-C | 16.58 | 69.18 | 44.81 | 69.19 |
| Investment Grade | 0.07 | 2.09 | 0.20 | 4.14 |
| Non-Investment Grade | 4.29 | 31.37 | 7.37 | 42.35 |
| All | 0.10 | 9.70 | 0.29 | 12.98 |
Of course the point of the legislation was that Municipal Bond issuers were having to pay higher interest rates because of discrepancies between the ratings of the two categories.
With market conditions changing, I went in search of a bond default time series useable in a regression analysis against common economic time series. Fortunately for me, I found an article from the fine folks at S & P describing a statistical analysis they did using one of their databases. The explanatory variables produced by the model are: Moving Average Default Rates for the current Period, Average Default Rates for 3 months prior, and another model based on the how long since the bond had been issued. Even more interesting are the variables they tried, but had no explanatory power. Some of the list include:
- Index of Industrial Production
- GDP Growth
- Equity Indexes
- VIX
Reading that article saved me a lot of time! But my take on the results are that the most important factors in predicting future bond defaults are the current state of bond defaults and bond age, and that general economic activity doesn't help predict bond defaults.
Posted by Bond Bore at 15:30 2011-08-25 | Trackbacks (0) | Comments (0)
Yield on 10 Year Falls Below 2% in Interday Trading (General)
In interday trading day trading today the yield on the 10 year treasury bill fell below %2.0, before moving back over %2.0. The historical moment brought out the poetic in Barron's writer Randall Forsyth who observed:
In a dramatic example of Will Rogers’ Depression-era observation that return of capital is more important than return on capital
Posted by Bond Bore at 13:21 2011-08-18 | Trackbacks (0) | Comments (0)
Widening Risk Premium for Junk Bonds Implies Recession (Junk Bonds)
The Wall Street Journal ran an interesting piece that asserted:
Investors are pricing a recession into the value of high-yield bonds, a dramatic turn of fortune for securities that had been market darlings over the two years after the financial crisis.
Following the Federal Reserve's dim outlook on the U.S. economy, investors have pushed risk premiums on high-yield, or "junk," debt in the secondary market to an average of 7.39 percentage points above comparable Treasury yields.
"Now that we are in the 700- to 750-basis-points range, the market is pricing in a decent chance of a recession," said Michael Anderson, a high-yield strategist at Citigroup.
By way of comparison, during the previous recession in 2001, risk premiums ranged between eight and 10 percentage points until early 2003, when lower rates helped more money flow into system. During the downturn in 1990-91, these premiums were in the 7 to 10 percentage points range.
Besides the fact that the previous recession wasn't in 2001, it might be interesting to compare actual data. The chart below shows the difference, or spread, between the FINRA/Bloomberg Corporate High Yield Bond Index yield and the yield on the 10 Year U.S. Treasury Bond. The shaded area shows the most recent recession.
The sharp recent move is clearly a departure from the typical pattern and the direction certainly implies the expectation of a recession. But the recent patterns also indicate that the spread could widen at least another 10 points, hurting high yield bond investors who need to sell during the next year to eighteen months.
Posted by Bond Bore at 07:42 2011-08-14 | Trackbacks (0) | Comments (0)
