Junk Bond Covenants Less Strigend Than Their Previous Junk Deals.....

Let´s be generous and call this kind of datapoint "frothy"...... ;-) Make sure you take a closer look at the stunning example provided in the update at the end of the post........

Höflich formuliert dürften Daten wie diese als "überschäument" durchgehen.... ;-) Verweise in diesem Zusammenhang ausdrücklich auf das Beispile das ich am Ende des Postings im Update verewigt habe.....

Bond Markets Get Riskier WSJ

One of the worrisome developments is occurring in the junk-bond market, where companies are taking advantage of strong demand to sell bonds that have fewer protections for investors than similar bonds sold by the companies in years past.

Some have watered down covenants, which are supposed to protect investors if a company is sold and prevent companies from loading on too much other debt or paying out their cash, which would cause a drop in value of the bonds or make it less likely the bonds they hold would get paid off.

Fifty-seven percent of junk-bond issuers had less-stringent covenants than their previous junk deals, according to an analysis for The Wall Street Journal by Covenant Review which analyzed 58 junk bonds issued in 2010 by companies that previously had issued debt. Just one deal had stronger covenants for investors. Some 41% of the deals had the same covenants.

"It reflects a weakening in covenant protections even below those existing at the peak of the market, in 2006 and 2007," Alexander Dill said in a May report from Moody's.

Junk bond prices hit pre-crisis levels FT

Strong investor demand for junk bonds has pushed the average price on such corporate debt to its highest level since June 2007, when companies could borrow with ease at the height of the credit boom.

The Bank of America Merrill Lynch index used by many investors to track the junk bond market – bonds sold by companies with credit ratings below investment grade – rose last week above 100 for the first time since the start of the credit crunch.

Dealogic, the data provider, said junk bonds sold to US investors so far in 2010 reached $168bn (€129bn) last week. This is more than was marketed in the whole of 2009, when the $164bn total set a record.

Mr Fridson said the average spread was 625 basis points over US Treasuries, still far above the level of June 2007, when spreads reached lows of close to 250bp.

In general i agree with the following statement and especially the headline "desperately seeking income" .... But signs of some kind of "serious excess" are clearly growing on a daily basis.....

Trotz allem kann man zumindest den Run in Sachen Unternehmesanleihen mehr als nachvollziehen.... Denke besonders die Überschrift "Einkommen verzweifelt gesucht" trifft den Nagel auf den Kopf..... Die Warnhinweise für eine gewisse "Sorglosigkeit" wachsen tagtäglich.....

Desperately seeking income FT Alphaville

...because corporate credit represents an attractive middle ground between equities and government bonds for income hungry investors

One can, of course, question the wisdom of piling into junk but given the paucity of alternatives it is understandable.

Things could really be getting "interesting" if the composition shifts away from the "refinancing" aka "extend & pretend" part..... I´m also sceptical that the markets have finally realised that this is "Not Your Father´s Recovery" & the deleveraging cycle is still in the first inning ( see Clevelend Fed "One Measure Of Corporate Leverage Recently Reached A New Historical High" ) .....

Denke das spätetstens wenn eine Verschiebung weg vom Refinanzierungs bzw "Extend & Pretend" Segment zu beobachten ist, die ganze Angelegenheit recht schnell mehr als "ungemütlich" zu werden droht....Bin mir zudem ziemlich sicher das der Markt noch immer nicht realisiert hat das die bisherige Erholung historisch gesehen nicht gerade "eindrucksvoll ausgefallen ist und das entgegen der täglichen Meldungen slebst bei den Firmen die "Entschuldungsphase" noch nicht wirklich aus dem Startblock gekommen ist ( siehe Clevelend Fed "One Measure Of Corporate Leverage Recently Reached A New Historical High" )....

Junk windfall Moody´s via FT Alphaville

Wouldn´t surprise me if the topic I Want My Buyback Back.... will be again on the agenda within 12-24 months....

Würde mich nicht wundern wenn das Thema I Want My Buyback Back.... binnen absehbarer Zeit erneut zu zweifelhaften Ruhm kommen wird.....

UPDATE:

NYT DealBook

THIS summer, executives from the New York-based private equity firm SK Capital traveled to Houston to celebrate the first anniversary of their acquisition of a nylon manufacturing business. Soon they will have a bigger reason to uncork the Champagne.

The nylon manufacturer has announced plans to issue about $1 billion in debt, of which $922 million will be used to pay a dividend to SK. For SK, which paid $50 million in cash for the business, that is an astonishing almost 18-fold return in a little more than a year.

Japan Pension Fund Becomes Net Government Bond Seller

So far every bet against JGB´s was a disaster.... But is at least not insignificant when the largest buyer for years has turned to a net seller...... I think when you take a look this link, the following presentation, the confident Rating Agencies & yields like this i think it´s safe to assume that the upside for bonds is "not substantial"......

Bisher haben Wetten gegen japanische Staatsanleihen etliche in den Wahnsinn und sicherlich auch in den finanziellen Ruin getrieben... Wenn aber nun der mit Abstand größte Akteur in diesem Segment nach Jahren von einem massiven Käufer zum Verkäufer notiert lässt das zumindest aufhorchen.....Wenn man sich diesen Link , die folgende Präsentation , die ( noch ) optimistischen Rating Agencies & die aktuellen Renditen vor Augen führt darf man sicherlich behaupten das sich das Chance/Risikoverhältnis nicht gerade merklich bessert...

Japan - Past the Point of No Return - By Vitaliy Katsenelson

H/T Barry Ritholtz

Flashback March 2010

The biggest JGB holder on the planet – the Government Pension Investment Fund (GPIF) – which has already admitted it’s no longer able to roll maturing bonds, has announced that it will open credit lines so it doesn’t have to sell them to fund its obligations…

Looks like they had to end the desperate attempt to stop the unavoidable....

Sieht ganz so aus als wenn jetzt der Zeitpunkt gekommen ist wo das Unvermeindliche nicht mehr länger hinausgezögert werden kann.....

Japan Pension Fund Becomes Net Government Bond Seller

July 13 (Bloomberg) -- Japan’s public pension fund sold more government bonds than it bought for the first time in nine years, underscoring concern that an aging population will make domestic investors less able to finance state borrowings.

The fund sold a net 443.2 billion yen ($5 billion) of Japanese government bonds in the year ended March 31, according to Bank of Japan data released last month. It held 79.5 trillion yen of the securities at the fiscal year end, 11.6 percent of the outstanding amount.

The retirement of baby boomers -- defined in Japan as those born between 1947 and 1949 -- may strain the public coffers as soon as 2012, according to Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo. “That may be when Japan’s sovereign risk becomes evident,” he said in an interview in May.

So far the € crises has helped to fill the gap......

Da kommt die momentane € Krise ganz passend.....

M.Pettis

China bought a record amount of Japanese government bonds in May, in an apparent move to shift more of its massive foreign exchange reserves into Japanese debt. Chinese net purchases of Japanese government bonds soared to Y735.2bn ($8.3bn) in May, far outpacing the Y541bn in JGBs bought from January to April, according to Japanese finance ministry figures.

It will be interesting to see if or probably better when the BOJ will be "forced" to start QE Version 18 & 19..... With or without QE this alternative looks much more promising.....

Denke der entscheidende Faktor dürfte sein was die BOJ in Sachen QE machen wird.... Dürfte da über die Jahrezehnte wohl dann Version 18.0 & 19.0 sein..... Mit oder ohne QE ich denke diese Alternative dürfte in jedem Fall vielversprechender sein

"The Unhappiness Of The Seller Does Not Mean That There Is No Market."

As always superb "Anti Spin" from Hussman.....Long read but with all markets at new highs & on a global scale well over 1 trillion in taxpayer money for the still ongoing bailouts , QE, ZIPR etc it is more important than ever to ask what happened to "the toxic assets" ..... Hussman focusses mainly on US mortgages but i think it is safe to say that similar things are true globally when it comes to CRE, corporate loans etc... Fits nicely to Fridays post "Surprise, Surprise....." Big Banks Mask Risk Levels - Quarter-End Loan Figures Sit 42% Below Peak .....I have to repeat myself when it comes to the ÜBERBULLISH Cramer´s Bull Case For Banks

"Would at least be honest if he mentioned the "ultimate moral hazard trade" & the "Enron-esque characteristics" when it comes to accounting as the two main reasons behind the motives to own banks.. ;-)"

Dringend benötigter "Anti Spin" vom gewohnt erstklassigen John Hussman....Recht ausführliche aber im Angesicht der neuen Markthochs aber unbedingt lesenswerte Ausführungen wenn es um das von einigen bereits als "gelöst" bzw. verdrängt geltende Problem der "Toxic Assets" geht....Schon erstaunlich ( einige würden auch sagen schockierend...) was weltweit gesehen wohl locker über 1 Billion an Steuergeldern die noch immer weiter fliessen ( siehe "The Rolling Bailout Bus" ) , QE, ZIRP usw bisher beim Kernproblem der Krise bewirkt haben.....Obwohl Hussman hier in erster Linie Hypotheken abhandelt ist es sicher keine Übertreibung zu behaupten das weltweit ähnliches auch für gewerbliche genutzte Immobilien sowie Firmenkredite gilt....Wie gemacht als perfekte Ergänzung zum letzten Posting "Surprise, Surprise....." Big Banks Mask Risk Levels - Quarter-End Loan Figures Sit 42% Below Peak ......Muß mich leider erneut wiederholen wenn es um zunehmend bullische Bankempfehlungen ( für ein besonders krasses Beispiel siehe Cramer´s Bull Case For Banks ) und damit indirekt auch für den Gesamtmarkt geht.....

"Wäre zumindest ehrlich gewesen wenn er in seinen 10 Gründen die unbedingt dafür sprechen sofort massiv Bankaktien zu kaufen den "ultimativen Moral Hazard Trade" sowie die kreative Bilanzierung die stark "Enron-esque characteristics" aufweist als die Topgründe aufführen würde.... ;-)"

Extend and Pretend John Hussman

With regard to credit conditions, the U.S. financial system continues to pursue a strategy of "extend and pretend." A year ago, the Financial Accounting Standards Board (FASB) suspended rule 157, which had previously required banks to mark their assets to market value when preparing balance sheet reports. The basic argument was that fair values were not appropriate because there was "no market" for troubled assets. Certainly, the FASB could have implemented something at least modestly reasonable, such as 2-year or 3-year averaging, but instead, they changed the rules to allow "substantial discretion" in the valuation of bank assets in their financial reports.

To a large degree, the idea that there was "no market" for troubled assets was false even at the time. Last year, Dean Baker of the well-regarded Center for Economic Policy Research (CEPR) testified before Congress, observing "There has been considerable confusion about the nature of the troubled assets held by the banks. While banks do hold some amount of mortgage-backed securities, these securities are in fact a relatively small portion of their troubled assets. The troubled assets on the banks' books are overwhelmingly mortgages, both first and second or other junior
liens, not mortgage-backed securities. The FDIC has acquired large quantities of mortgages from its takeover of several dozen failed banks over the last year. It auctions these assets off on an ongoing basis. The results of these auctions are available on the FDIC website. Non-performing mortgages typically sell in these auctions at prices in the vicinity of 30 cents on the dollar."

He continued, "It is not clear on what basis these auctions can be said not to constitute a market. While the downturn and the constricted credit conditions affect the market, it is simply inaccurate to claim that there is no market for these assets. The major banks are undoubtedly not pleased at the prospect of having to sell off their loans at these prices, but this merely indicates that they are unhappy with the market outcome, just as a homeowner might be unwilling to sell her house at a loss. However, the unhappiness of the seller does not mean that there is no market."

The impact of "extend and pretend" is to create a gap between the reported value of assets and the value they would have on the basis of the cash flows that those assets can reasonably be expected to generate over their maturity. In order to avoid having to restate assets, banks have allowed an increasing gap to develop between the volume of delinquent loans and the volume of loans actually in foreclosure, creating a growing "shadow inventory" of impaired but unmodified and unforeclosed loans.

Moreover, regulatory changes over the past year have affected what actually gets reported as "troubled." As the New York Times recently observed, " A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as
troubled. Now it can do that to the $1 million difference only." In effect, even though impaired loans tend to sell at only 30-50 cents on the dollar (reflecting a modest haircut to the amount typically received in foreclosure), banks can choose the amount of assets it reports as troubled simply by choosing what value to assign the property while it holds the bad loan on its books.

While it's interesting that credit card delinquencies have eased off modestly in recent months, this is not necessarily a healthy sign. Even in the third quarter of 2009, TransUnion reported that consumers delinquent on their mortgages but current on their credit cards increased by 6.6%. In effect, people have been choosing to pay their credit cards in priority to their mortgages.

As for policy efforts to reduce delinquencies, I've long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. It's one thing to extend the loan in a way that preserves its present value, by swapping a claim on future appreciation in return for principal reduction, but it's quite another to offer to cut the principal outright. The reason ist that instead of confining the assistance to presently troubled borrowers, you create a whole new set of borrowers who then choose to be troubled in order to get the assistance. According to a University of Chicago study, "strategic defaults" - where people choose to default on their mortgages even though they can afford to pay - accounted for 35% of all residential defaults in December 2009, up from 23% in March 2009. Offering public subsidies for this behavior, when too many homeowners are already legitimately struggling, does not smack of a bright idea.

The New York Times recently provided a good picture of how the delinquency situation stood at the end of 2009 (based on FDIC data):

In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930's that when you don't require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.

Will it work? Will it change?

Regardless of whether the U.S. banking system would not presently be able to meet its liabilities with its assets, there is another question: assuming that banks are allowed to extend and pretend for a long enough period of time, will they ultimately be able to accumulate enough retained earnings in the years ahead to cover eventual loan losses? In other words, is it possible that everything will be OK if we just look the other way long enough?

From my perspective, it depends on what "OK" means. Simply in terms of long-term solvency - assets being ultimately able to meet liabilities - my impression is that yes, given enough time, retained bank earnings should cover the losses on existing loans. Indeed, it's possible that banks might be able to report fairly healthy "operating earnings" to investors, and then somewhat more quietly write off losses as "extraordinary" charges over a period of years. This type of outcome is beginning to look possible, because investors evidently don't mind repeatedly having their pockets picked as long as "operating earnings" come in above analyst estimates.

Unfortunately, in that sort of world, the economy would likely be hobbled for a long period of time, as Japan has discovered over the past couple of decades. With banks focused primarily on survival and recapitalization, retained earnings would be directed to making the existing liabilities whole, rather than contributing to productive new investment.

So to the extent that "extend and pretend" is successful in averting insolvency concerns, it will also tend to weigh down lending activity, as resources are allocated toward servicing existing debt burdens on bad assets, rather than toward new lending for productive activity. The most efficient outcome is always for lenders who provide capital to take losses if the loans go bad. That sort of market discipline is the only way to ensure that capital gets allocated properly. This is not the world that we have lived in over the past year, as policy makers have pledged public money to make private bank bondholders whole, regardless of how irresponsibly the banks allocated the money. But it is important to recognize that this policy comes with longer term costs.

Needless to say that i think he is spot on....... It will be interesting to see how Mr. Market will react to the quality of ( bank ) earnings / balance sheets during the reporting season.....This could be at least a possible trigger to calm down the "somewhat elevated" risk appetite significantly.....

Überflüssig zu erwähnen das ich zu 100% übereinstimme..... Es wird spannend zu beobachten inwieweit in der jetzt startenden Berichtssaison die Gewinn und Bilanzqualität der Banken hinterfragt wird.... Sehe hier durchaus erhebliches Potential den "leicht erhöhten" Risikoappetit doch merklich zu zügeln.....

UPDATE:

Profit for Banks Dimmed by Home-Equity Loss Seen at $30 Billion

April 12 (Bloomberg) -- Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co. may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year.

Global Banking System Extend and Pretend Insolvency Mish

I happen to agree with John Hussman on all points mentioned. Moreover, it is not just the U.S. banking system that is insolvent, the global banking system is nothing but a giant extend and pretend operation including the PIIGS (Portugal, Ireland, Italy, Greece, Spain), China, the UK, and even Canada as soon Canada's gigantic housing bubble crashes.

Spot On Alex Cartoon :-)!

The DTA dodge FT Alphaville

The issue is that in order for banks to include DTAs in their Tier 1 capital, they need to be able to show regulators that they will generate enough income in the future to actually use them.

Citigroup, for instance, has been racking up enough losses in recent years to generate $47bn worth of DTAs at the end of 2009, about $21bn of which was included in their Tier 1 capital that year. So that’s $21bn coming out of years of losses, but based on the premise that the bank will soon be profitable.

They will find a "creative" way to reassure their future profibility..... The Treasury wants to sell a 7.7 billion shares within the next year... ;-)

Bin mir sicher das hier ein kreativer Weg gefunden wird um die zukünftige Profitabilität zu gewährleisten...Immerhin will das Finanzministerium noch 7,7 Mrd Aktien binnen 12 Monaten auf den Markt schmeissen ;-)

Foreclosure inventories hit record

February's foreclosure rate of 3.31% represented a 51.1% jump from February 2009

From Level I to Level III, the myth of fair value FT Alphaville

Lehman Channeled Risks Through ‘Alter Ego’ Firm NYT

Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.

"ENRON-ESQUE" .......

The search for Basel III loopholes begins Felix Salmon

Most of the arguments could be made only by banks who have been drinking their own kool-aid for so long that they no longer have any idea what sounds ridiculous and what doesn’t.

CHUZPAH!

Meredith Whitney vs the Banks Paul Kedrosky



She has not one single buy rating in the space she is covering.....

Eine der wohl besten Bankenanlaysten hat nicht eine einzige Bank auf "BUY".....

Profit Margins, Margin Debt & Margin Of Error.......

Combine the data points with the excellent When Risk-Return Makes No Sense: How To Deal With An Overvalued Market and it should be clear that Mr. Market is walking on very thin ice now... I must admit that this is my view since September/October......Cannot help but it at least smells a little bit like "Flucht In Sachwerte"... I still think that the risk / reward is far more favourable in GOLD... ;-)

Wenn man die folgenden Daten mit dem extrem lesenswerten When Risk-Return Makes No Sense: How To Deal With An Overvalued Market kombiniert wird klar das man sich momentan auf sehr dünnem Eis bewegt.... Muß gestehen das ich diese Ansicht seit dem September/Oktober vertrete.... So langsam kann man zumindest unterschwellig das Gefühl haben das zumindest in Teilen eine "Flucht In Sachwerte" eingesetzt hat.....Bin mehr denn je überzeugt das in Sachen Chance/Risiko die Aussichten für GOLD weitaus vielversprechender sind.... ;-)

William Hester / Hussman Funds

While earnings growth expectations are steep, sales growth expectations are more modest. Sales-per-share for S&P 500 companies is expected to grow about 5.5 percent this year and about 7 percent next year, according to forecasts. The difference between the growth rates of the top and bottom lines is implies a forecast for sharply rising operating profit margins. The graph below is updated from an earlier piece, and includes forecasts through the end of 2012. It plots the long-term level of S&P operating margins in blue. In red, I've plotted the operating margins currently being forecasted by analysts based on their projections for sales and earnings. Last October, analysts were about half way to pricing in profit margins that matched the record levels of 2007. Now, they are just about there.

David Rosenberg / Gluskin Sheff

As for 2011, the consensus is looking for $97 on S&P 500 operating EPS — we did $95 at the peak of the last cycle when the unemployment rate was at 4.5%, the industry CAPU rate was 81%, private sector credit xpanding at a 16.2% annual rate and nominal GDP at a 4.9% YoY pace.

So the consensus believes that barely two years into the second weakest post-recession recovery in the past six decades that we will actually get back to peak profit levels seems to be a tad outlandish.

Stock Market Rally Explained The Mess That Greenspan Made

Ad in the the Money & Investing section of today’s Wall Street Journal

Factoring in the tight junk spreads right now one must assume that looking at the next chart the "Margin Of Error" is probably "slim"......

Da momentan selbst historisch gesehen recht enge Junk Spreads vorherrschen muß man beim Anblick des nächsten Charts wohl unterstellen das in Sachen "Margin Of Error" wenig "Spielraum" bleibt.....

Investors really ♥ junk. We mean really. FT Alphaville

In most discussions of the high-yield bond market, historical spreads play a major role. But comparing spreads today to those of the past assumes that junk bonds are a constant entity over time. Unfortunately, junk is junkier today, as illustrated by this chart [at left] from last October’s Global Financial Stability Report.

The fraction of CCC or lower-rated bonds approximately doubled from early 2007 to early 2009. And according to a recent report from Fitch, the fraction at the end of 2009 was still 27%.

Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.

H/T EconomPicData

The "risk trade" is currently clearly not in the early innings....... Looks like the Mantra Bullish. No Matter What & the "Moon Trade" ( brilliant!) is still alive & kicking.... ;-)

Der sog. "Risikotrade" befindet sich sicher nicht mehr im "Anfangsstadium"..... Sieht so aus als wenn das Motto Bullish. No Matter What sowie Ladies and Gentlemen, We Are Trading On The Moon ( brilliant!) momentan noch immer zu greifen scheint...... ;-)+

UPDATE:

PARTS OF THIS MARKET ARE LOOKING IRRATIONAL PragCap

Why Young People Should Buy Stocks on Margin Time H/T Denninger

We just survived the worst debt-fueled binge since the Roaring '20s. Now two professors at Yale University are suggesting we introduce leverage into a new realm of our lives —our retirement portfolios. TIME's Barbara Kiviat asked economists Ian Ayres and Barry Nalebuff to explain themselves.

You are advocating that people in their 20s and early 30s take all of their retirement savings and buy stocks on margin. Can you explain why that's not as crazy as it sounds?

"It's not as crazy as it sounds because it helps people better diversify risk across time"

Read this twice....

UBS: EQUITY MARKET RISKS APPROACHING EXTREMES PragCap

Irrational Exuberance Is Here: VIX Lowest Since July 2007 As Options Speculation Highest Since Dot Com Days

The VIX has just hit the lowest level since July of 2007 as Sentiment Trader reports that "speculation in the options market has spiked to its highest levels since the spring of 2000."

As i´ve said, not in the early innings.....

Wie gesagt, nicht mehr im Anfangsstadium......

Don´t Call It A Bubble........

After the introduction of the "Pay-If-You-Can-Loans" the comeback of Toggle/PIK Bonds are more than early warning signs that something is at least a little bit "frothy"...... The same is true for numerous stock markets ( see the following chart Mexican Stock Market Back To All Time Highs WOW!)

Nachdem ja vor kurzem die "Pay-If-You-Can-Loans" ins Leben gerufen worden sind ist die noch vor wenigen Monaten undenkbare Wiederaufersteheung der Toggle/PIK Bonds ein weiteres Anzeichen, das nennen wir es mal vorsichtig, eine leichte "Überhitzung" eingetreten ist.... Leider sieht es in etlichen Aktienmärkten nicht bedeutend anders aus ( siehe nachfolgden Chart Mexican Stock Market Back To All Time Highs WOW! )

Treasurers Embrace Pay-in-Kind Bonds as Ghost of Lehman Fading
( Bloomberg ) Companies are selling debt with terms last seen before credit markets froze, showing why the world’s biggest bond fund manager says another bubble may be brewing.

JohnsonDiversey Holdings Inc., a Sturtevant, Wisconsin, maker of cleaning supplies, and Wind Acquisition Holdings Finance SpA, parent of Italy’s third-largest mobile-phone company, sold bonds that can pay interest in new debt instead of cash, the first such deals since 2007, according to Bloomberg data.

Goodman Global Inc. raised $320 million to pay its owner, leveraged buyout firm Hellman & Friedman, a dividend, one of at least seven similar offerings since November

Two years after credit markets seized up, treasurers are luring investors to junk bonds that returned a record 58 percent last year, as measured by Bank of America Merrill Lynch indexes. U.S. sales of $162 billion beat the all-time high of $149 billion in 2006, Bloomberg data show.

“Six months ago I wouldn’t have imagined being able to do this deal,” said Karim-Michel Nasr, head of corporate development in Paris at Weather Investments SpA, Wind’s holding company.....

Capital Access

At least two dozen borrowers since November have asked lenders to change terms of debt agreements to permit bond sales, extend loan maturities or pay dividends to their owners, Bloomberg data show.

Access to capital means defaults will likely drop to 3.9 percent by November from 12.7 percent a year earlier, New York-based Moody’s Investors Service says.

Speculation that companies will have less difficulty making payments has led investors to accept lower interest rates and looser borrowing terms. The extra yield demanded on junk bonds instead of Treasuries narrowed to 6.39 percentage points at the end of 2009 from almost 19 percentage points on March 9, Merrill Lynch indexes show. Speculative grade debt is rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.

‘We Forget’

“I’m looking at some of the things that are being priced and I’m saying, ‘Wow, how quickly we forget,’” said JohnsonDiversey Chief Financial Officer Joseph Smorada. The market is “starting to get a little dangerously aggressive,” he said.

The company sold $250 million of so-called toggle debt due in May 2020 on Nov. 20 that allows it to pay a 10.5 percent interest rate either in cash or notes for the first five years.

The first pay-in-kind bonds since 2007 were part of a $2.6 billion recapitalization in which New York-based LBO firm Clayton Dubilier & Rice Inc. agreed to buy a 46 percent equity interest in the company.

Moody’s gave the notes its fifth-lowest ranking of Caa1, saying the debt is five times more than adjusted earnings before interest, taxes and amortization costs. It has had negative free cash flow the past three years, though it’s expected to break even in 2010, Moody’s said.

‘Dangerously Aggressive’

“In early 2009, I don’t think we could have borrowed a nickel if our life depended on it,” Smorada said. Investors submitted bids for almost four times the amount of notes offered, he said.

Investors haven’t lost discipline and companies are mainly selling bonds to refinance or cut interest expenses, said William Cunningham, the head of credit strategy and fixed-income research at State Street Corp.’s investment unit in Boston.

Wind Acquisition of Luxembourg raised $1.1 billion last month selling 7.5-year, 12.25 percent notes in dollars and euros that allow it to pay interest with more debt until 2014. Wind, controlled by Egyptian billionaire Naguib Sawiris and the parent of Wind Telecomunicazioni SpA, boosted the offering 50 percent as demand rose.

The investment flood has undercut efforts to toughen restrictions that protect investors, said Alexander Dill, senior covenant officer at Moody’s in New York. Many covenants are “largely replicating” rules from 2006 and 2007, Dill said in a Dec. 10 report.

TRW Automotive Inc., the world’s biggest supplier of vehicle-safety equipment, sold $250 million of eight-year notes in November rated Caa1 with covenants “substantially unchanged” from its 2007 indenture for debt graded four steps higher at Ba3, according to the Moody’s report. The Livonia, Michigan-based company said Dec. 22 it raised $400 million in term loans as lenders amended and extended its revolving credit facility.

FT Alphaville

Global high yield debt volume for the week of January 11th totaled $11.7 billion, the biggest week for high yield debt on record. The previous record was set during the week of November 5, 2006 when $11.4 billion was raised. With $14.4 billion raised so far this month, it is the best all-time start for the high yield markets since records began in 1980.

Update High Yield Bonds Continue To Do Well Bespoke

Over the past month or so, the only area of the bond market that has done well is junk. Both Treasuries and investment grade corporates have struggled, while high yield bonds have continued to surge. Below we highlight a six-month performance chart of the high yield bond ETF (HYG) and the investment grade corporate bond ETF (LQD).

Mortgage-Bond Leverage Reaches 10-to-1

Wall Street firms are loosening terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said.

Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime jumbo-home loans

Update

Bubble warning ( Economist )

Once again, cheap money is driving up asset prices ( Economist )

Ladies and Gentlemen, We Are Trading On The Moon :-) Reformed Broker