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Milken Faults Companies Failing to Cut Debt as Markets Recover

Michael Milken, chairman of the Milken Institute
Michael Milken, chairman of the Milken Institute, moderates a panel discussion during the 2010 Milken Institute Global Conference in Los Angeles, on Monday. Photographer: Jonathan Alcorn/Bloomberg

Companies failing to exploit the recovery in bond and equity markets to pay down debt are making a mistake, according to Michael Milken, the junk-bond billionaire turned philanthropist.

Near-zero interest rates in the U.S. and Europe have fueled demand for high-risk securities, providing companies with an opportunity to cut debt incurred during the excesses of the credit boom, Milken told an audience at the Milken Institute Global conference yesterday in Beverly Hills, California.

“It’s the individual’s fault, the individual leadership of that organization, if they are not taking advantage of today’s markets to sell equity and debt, de-leverage and push out maturities,” he said during a panel moderated by Matt Winkler, editor-in-chief of Bloomberg News.

Companies sold $98.9 billion of high-yield bonds in the U.S. this year, on pace to beat the record $162.7 billion issued in 2009 after government measures unlocked credit markets frozen by Lehman Brothers Holdings Inc.’s collapse. The extra yield investors demand to own junk bonds instead of Treasuries fell to 5.51 percentage points yesterday from a peak of 21.82 percentage points in December 2008, according to Bank of America Merrill Lynch’s U.S. High-Yield Master II index.

The average junk bond traded at 99.5 cents on the dollar from a low of 54.9 cents on Dec. 15, 2008, Merrill data show.

Risks ‘Exaggerated’

“Defaults were exaggerated, the risks were exaggerated,” Milken said of the recovery in high-yield bonds. “Those risks existed in mortgage-backed securities, but they didn’t exist in industrial companies, and that’s what the market is saying.”

The debt has returned 4.8 percent this year, following a record 58 percent return in 2009, Merrill data show. High-yield, or junk, bonds are ranked lower than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.

Milken, 63, pioneered the junk-bond market in the 1970s as the high-yield bond chief at Drexel Burnham Lambert Inc. He was indicted on 98 counts of racketeering and securities fraud in 1989, ultimately serving about two years after a plea bargain and sentence reduction.

For the past decade he has focused on philanthropy and running the research institute he founded, which seeks ways to generate capital for people around the world.

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