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Can a Revived Junk Bond Market Prevent a Loan Blowup?

Where’s the next financial blowup coming from? The Deal’s Vipal Monga lays out the case for the leverage loan market. $450 billion dollars of loans need to be repaid between 2012 and 2014 and that’s a big problem.

Companies rarely pay the loans back with their own cash. Instead, they take out a new loan and pay the old one back. But the market for those loans is pretty limited. Pre-credit crisis, they were packaged into collateralized loan obligations. With the CLO market all but dead, “an inevitable spate of defaults and restructurings… will result,” says Reuter’s Felix Salmon.

But there is a sliver of hope and it’s called the junk bond market, says Guggenheim Investment Advisor’s chief investment officer Charles Stucke.

At the end of 2008, the junk bond market was all but dead (Bloomberg data shows a mere $3.43 billion from seven issues). Few companies could afford to bring a new issue to market nor would investors have been lining up to buy them. What a difference a couple of quarters make. We still have a few weeks until the end of June, but junk bond issuance has already hit $39.22 billion from 77 companies, more than was issued during the same period in 2008. That money could go to paying off maturing loans.

Clearly, a lot has to go right. Investor demand for junk needs to remain high and get a lot higher (something I doubt will happen as spreads between investment grade and high yield narrow). And companies have to plan better than their history suggests they’re capable of doing. But even the slimmest of chances is better than no chance — isn’t it?

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