Corporate failures have slowed, as companies once on the verge of default have found a new life. These companies are now refinancing their balance sheets with new debt, pushing out maturities on existing loans or using distressed-debt exchanges to avoid a bankruptcy filing.According to the article, casino operators Harrah's and MGM Mirage, homebuilder Beazer Homes, Michaels Stores, and Ford were all able to roll over their debt.
Speculative-grade companies -- or those with "junk" credit ratings -- have issued about $123 billion in new bonds this year, compared with roughly $48 billion in all of last year, according to data provider Dealogic. That's on pace to challenge 2006's record issuance of more than $143 billion, Barclays Capital analysts said late last week.
Many analysts worry the refinancing wave is just "kicking the can" down the road, without fundamentally fixing companies' deeper problems. Among weaker companies, about $1.4 trillion in bonds and loans will still come due in the next five years, said Dominic DiNapoli of FTI Consulting, a business advisory firm.
Despite the lull in corporate failures, there have been signs in recent weeks that bankruptcies could tick upward again. There have been several high-profile filings, including Capmark Financial and CIT. Already, five big companies have filed in November.
It remains unclear "how long the window will stay open" for weaker companies to borrow, said Barclays Capital restructuring chief Mark Shapiro. "Six months ago, no one thought that many of these companies could access the high-yield market." For the time being, he said, it's helping a lot of companies avoid "bankruptcies that would have otherwise occurred in the next year."
Distressed companies were shut out of credit markets in the winter as investors demanded yields on junk bonds that typically exceeded 20%. Now, average yields are closer to 10%, according to the Merrill Lynch U.S. High-Yield Master II Index.
Given rampant overcapacity everywhere, all this does is postpone the problems. Thus, bankruptcies will come later rather than sooner. However, as I have said before, as long as the corporate bond market remains healthy, equities are likely to fetch a bid.
Still, most of those companies are deep in junk territory and revenues are questionable at best. Much of these refinancings will eventually go to debt heaven. It's just a matter of time. In the meantime, note that there is still $1.4 trillion in bonds and loans will still come due in the next 5 years. In spite of a near-record year in corporate financing, we are only on pace to refinance $143 billion or so.
At some point the corporate bond market will choke on the amount of junk that needs to be rolled over. It's just hard to say when.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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