Payback Time - Avalanche of Maturing Junk Bonds Looms for...

http://www.nytimes.com/2010/03/16/business/16debt.html?hp

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10-03-16 3:40 AM

Payback Time - Avalanche of Maturing Junk Bonds Looms for...

http://www.nytimes.com/2010/03/16/business/16debt.html?hp

PAYBACK TIME

Junk Bond Avalanche Looms for Credit Markets
By NELSON D. SCHWARTZ Published: March 15, 2010

When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster. Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.

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With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies. The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt. Indeed, worries about the growth of national, or sovereign, debt prompted Moody’s Investors Service to warn on Monday that the United States and other Western nations were moving “substantially” closer to losing their top-notch Aaa credit ratings. Sovereign debt aside, the approaching scramble for corporate financing could strain the broader economy as jobs are cut, consumer spending is scaled back and credit is tightened for both consumers and businesses. The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd. Even Moody’s, which is known for its sober public statements, is sounding the alarm. “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s. Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis. That is because the record number of bonds and loans that were issued to finance those transactions typically come due in five to seven years, said Diane Vazza, head of global fixed-income research at Standard & Poor’s. In addition, she said, many companies whose debt matured in 2009 and 2010 have been able to extend their loans, but

The New York Times

Payback Time
Articles in this series will examine the consequences of, and attempts to deal with, growing public and private debts.

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10-03-16 3:40 AM

Payback Time - Avalanche of Maturing Junk Bonds Looms for...

http://www.nytimes.com/2010/03/16/business/16debt.html?hp

Previous Articles in the Series

Related
Moody’s Says U.S. Debt Could Test Triple-A Rating (March 16, 2010)

the extra breathing room is only adding to the bill for 2012 and after.

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014. The credit markets have gradually returned to normal since the financial crisis, particularly in recent months, making more loans available to companies and signaling confidence in the pace of economic recovery. But the issue is whether they can absorb the coming surge in demand for credit. As was the case with the collapse of the subprime mortgage market three years ago, derivatives played a big role in the explosion of risky corporate debt. In this case the culprit was a financial instrument called a collateralized loan obligation, which helped issuers repackage corporate loans much as subprime mortgages were sliced, diced and then resold to other investors. That made many more risky loans available. “The question is, ‘Should these deals have ever been financed in the first place?’ ” asked Anders J. Maxwell, a corporate restructuring specialist at Peter J. Solomon Company in New York. The period from 2012 to 2014 represents payback time for a Who’s Who of private equity firms and the now highly leveraged companies they helped buy in the precrisis boom years. The biggest include the hospital owner HCA, which was taken private in 2006 by a group led by Bain Capital and Kohlberg Kravis & Roberts for $33 billion, and has $13.3 billion in debt payments coming due between 2012 and 2014. Another buyout led by Kohlberg Kravis, for the giant Texas utility TXU, has $20.9 billion that needs to be refinanced in the same period. Realogy, which owns real estate franchises like Century 21 and Coldwell Banker, was taken private by Apollo in the spring of 2007 just as the housing market was beginning to unravel and as the first tremors of the subprime crisis were being felt. Realogy was saddled with $8 to $9 of debt for every $1 in earnings, well above the “$5 to $6 level that is manageable for a company in a highly cyclical industry,” according to Emile Courtney, a credit analyst with Standard & Poor’s. Realogy has survived — barely. “The company’s cash flow is still below what’s needed to cover the interest on its debt,” Mr. Courtney said.
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A version of this article appeared in print on March 16, 2010, on page A1 of the New York edition.

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10-03-16 3:40 AM

Payback Time - Avalanche of Maturing Junk Bonds Looms for...

http://www.nytimes.com/2010/03/16/business/16debt.html?hp

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