Borrowing costs hit fresh low
By Aline van Duyn in New York

Published: April 27 2009 20:02 | Last updated: April 27 2009 20:02

The cost of borrowing for the riskiest companies has fallen to its lowest level in more than six months and prompted a surge in new debt issues, increasing hopes that the worst stage of the financial crisis may be over.

The ability of a growing number of companies – including those seen as having a higher risk of default and whose debt is classified as “junk” or “high yield” – to raise money signals an increased willingness by investors to lend money.

EDITOR’S CHOICE
‘Fallen angels’ total highest since 1997 - Apr-16High-yield bonds feel thaw - Apr-27US plan raises the pressure on junk bonds - Apr-02For many months, private investors have shied away from lending money to risky companies and banks amid concerns that financial markets might again revert to crisis mode and that the value of investments would fall sharply.

But in recent weeks the stabilisation of parts of the banking sector, following huge injections of government funds, has allowed parts of the capital markets to thaw.

Companies with high credit ratings and low risks of default have been able to borrow in the debt markets for most of this year, but riskier companies have only returned in recent weeks.

The rally in the equity markets has been further fuelled by this development, as access to funding is an important factor in potential future growth.

The amount of new debt borrowed in the US junk bond market has risen to more than $7bn so far in April, its highest level since July last year, according to Dealogic data. However, analysts said the improvements did not yet signal a complete turnround in the credit markets, which will still be affected by the economic environment and the probable further deterioration in economic fundamentals.

Default rates are also expected to keep rising for much of 2009.

“Economic growth is still deeply negative, which translates into very negative cash flows,” said analysts at Goldman Sachs.

“And despite improvements in the high-yield, new-issue market on the back of this rally, funding prospects remain very challenging,” the Goldman Sachs analysts continued.

Specifically, it remains very difficult for the riskiest companies – those whose credit ratings signal a very high chance of default – to borrow money from investors.

Until there is a shift in the ability of these companies to raise money needed to avoid defaulting on their debts, or to complete debt exchanges which can be vital for their survival, it is too early for the credit markets to be given the “all clear”.

“The ability for more levered credits in high yield to access the markets will be a clear signal that credit rationing has waned,” said Greg Peters, global head of fixed income research. “While we have seen a meaningful rally in the lower quality credits, there are clear signs of credit differentiation that we expect to persist.”
Copyright The Financial Times Limited 2009