Some bondholders in financial companies that have gone bust or have been taken over are faring well -- but some aren't, and that is driving investors away from the overall corporate-bond market.The bonds of certain finance firms, such as Bear Stearns Cos. and Wachovia Corp., that have been rescued by large acquirers are faring a lot better than they would have if the issuers had been allowed to go bust.
Meanwhile, the shadow cast by uncertainty over the bonds of troubled financial firms, as well as the overall credit crunch, has shrunk the issuance of corporate bonds overall. "It's increased uncertainty, and markets hate uncertainty," said Guy LeBas, a fixed-income strategist at Janney Montgomery Scott.
J.P. Morgan Chase & Co. inherited all of Bear Stearns's bonds when it bought the distressed firm in the spring. Some of Bear's old bonds lately traded at close to par, or 100 cents on the dollar.
But in Washington Mutual Inc.'s case, J.P. Morgan only bought the banking operations; it didn't acquire any unsecured debt or preferred stock. Those orphaned WaMu bonds traded Wednesday at between 15 and 65 cents on the dollar, according to figures from MarketAxess.
At one point, holders of WaMu's cast-off bonds thought they would get nothing, or nearly nothing, on those investments. But the bonds recovered some ground earlier this week when the non-J.P. Morgan piece of WaMu submitted a federal filing saying it had some $5 billion in cash on hand. That encouraged the market, suggesting the bonds stood a better chance of maintaining interest payments.
On the other hand, Citigroup Inc. has agreed to assume roughly $54 billion in Wachovia debt as Citi assumes control of Wachovia's banking operations. As a result, some Wachovia debt traded Wednesday at as high as 91 cents on the dollar.
Most of Lehman Brothers Holdings Inc. is being taken over by U.K. giant Barclays PLC. But not its bonds. Holders of Lehman Brothers' bonds should receive only a "recovery rate" -- essentially, what can be paid after a bankruptcy settlement, said Joseph Scolato, managing director at Jefferies & Co.
That rate could be low, said Mr. LeBas, given the prices he has seen on sales of Lehman's assets, such as wealth-management arm Neuberger Berman, which sold as part of a $2.15 billion package. Some Lehman issues changed hands Wednesday for close to 12 cents on the dollar.
"I still think it's a mine field out there," said Robert Pavlik, chief investment officer at Oaktree Asset Management, who sold out of Morgan Stanley's bonds two weeks ago. "Your total return is going to be affected if this credit crisis continues. It's just driving people away from corporate debt and preferreds, and into U.S. Treasurys. People can't get into Treasurys fast enough."
Total return on U.S.-issued, investment-grade corporate debt has fallen by about 9% so far this year, according to a Merrill Lynch index. There have been 237 new domestic cheap surety bonds issued so far in 2008 from financial companies, excluding insurers, according to data from Dealogic. That is down from 394 for the same period last year. Almost all in both years were investment grade. Because of its constant need for capital, the financial sector remains the largest in bond issuance.
To attract investors, issuers have had to pay increasingly high yields. A Merrill Lynch index that tracks investment-grade financial issuers shows the premium paid over Treasurys at 6.36 percentage points as of Tuesday, compared with 3.09 points three months earlier.
Nevertheless, the volume of investment-grade corporate bonds fell 68%, to $72.18 billion, in the third quarter from a year earlier, according to data from Thomson Reuters.
By: Annelena Lobb
Wall Street Journal; October 2, 2008
