C.M.O. 8.25.2009
Credit Market Overview
August 25, 2009
One of the interesting things about markets is how supply is created by demand. If there is someone willing to spend money there will be someone that figures out how to sell them something.
One of the ways in which this has manifested itself during the thaw that has occurred since Lehman’s collapse froze things solid is in the lending markets. Banks, bloated with gobs of festering assets were taking the easy way out, hoping that the decay would reverse itself magically, but were unable to lend in the meantime. Cash reasserted itself as king.
Businesses that needed money could no longer go to their friendly banker and get a loan. For the parts of the economy that were still working this posed a demand without supply problem. The markets, in their infinite wisdom, came up with a solution; find investors willing to lend and channel the demand from loans to securities. Not the synthetic stuff that was part and parcel of the problem but good old senior secured debt.
Evidence of just how well this is working came as Dealogic, a compiler of deal data, said that as of July 15th global corporate bond issuance volumes hit the $1.1TN mark in 2009, passing the previous record of $893.3BN mark set in 2007 by 22%. The morphing of supply to meet demand was most evident in Europe as bank lending has traditionally been the main source of liquidity there. This year, however, there has been $426.5BN in nonfinancial bond issuance vs. just $290.4BN in 2008.
With all of that fresh, clean paper around it would seem strange that some would prefer to buy the old stuff but its happening. The difference is that most of those buying existing debt are those buying their own debt back.
Adding to the curious nature of these transactions is that a few of those purchasing their own debt were themselves questionable survivors when the “Ice Road Truckers” drove down Wall St.
Beazer Homes USA (BZH), Hovnanian Enterprises Inc. (HOV) and Tenet Healthcare Corp (THC) are three names that have bought back debt in 2009 and lest you think this is just a move by the fringe element, S&P reported recently that below investment grade companies have repurchased a total of $1.4TN of debt with maturities out to 2014 in 2009.
“The real issue for companies is how they delever, and every little bit counts”, said Judith Fishlow Minter, a managing partner at North Sea Partners in New York.
THC bought back $68MM worth of debt in July for about $60MM while BZH did a bit better spending $58MM to get $115.5MM or about 8% worth of their debt back. Allan Merrill, BZH’s CFO said the purchase was “part of efforts to address our capital structure”. Between February and April of this year HOV, another home builder, used $223MM to buy $578MM in debt.
THC’s CDS spreads had come down from 1549bps in 1Q09 to 632bps on 6/12 before moving up to 813 on 6/24. Not much of a correction after the halving spreads took during 2Q09. From their late June blip CDS continued lower getting back down to 637bps on 8/4. On the CDS’s way down the first time the stock hit a high of $3.81 but on the CDS’s revisit to the ~630bps level the stock moved as high as $4.85. This might lead one to believe the market likes de-levered companies.
BZH’s CDS spreads more or less came down and stayed down from March of this year although the stock moved higher, corrected and then moved to a new high as various macro themes played out in the economy. The low in the stock came on March 9th when you could have picked up a share for “two bits” and the high for 2009 was posted on 8/14 when your earlier $0.25 investment would have fetched $4.23.
HOV’s CDS/equity movement looks a lot like BZH’s (wonder why!) with the early March high in CDS of 4272bps missing by a day the $0.58 low in the stock. The low for the CDS came on 6/11 with a close of 1126bps but the stock after correcting to $1.81 on 7/8 from an earlier run up gathered itself for a summit attempt hitting $4.42 on 8/7.
Suffice to say that the credit crunch has highlighted balance sheet health and those in the equity markets seem to enjoy owning that which is most unlevered.
Enjoy the week.
Jim Delaney
