Sabic bond delay symptomatic of growing commercial debt crisis
Posted on 27 May 2010 with 2 comments from readers
Saudi Basic Industries Corporation, the largest company in the Middle East, has delayed its latest commercial bond sale because the interest rates demanded by borrowers were too high. This is just a sign of the times as market forces re-price risk in commercial bonds.
This week the percentage of corporate bonds deemed in distress has risen to the highest level this year as investors are dumping the weakest borrowers on concern that Europe’s debt crisis is going to make it impossible for them to refinance.
Divergent bond prices
It is noticeable that commercial bond prices are heading in one direction while US treasury bonds are heading in the other, thanks to a flight to percieved safety by stock market investors. However, it is true that the link between commercial paper markets and equities is very obvious as the equity of companies that cannot raise finance is worth less, if not worthless.
Indeed, rising commercial bond rates mean the arrival of higher interest rates that will signal the end of the road for some highly indebted companies, something that would have happened much earlier in the recession if it had not been for the huge intervention by governments to keep interest rates down.
If weaker companies are now going to find it too expensive to refinance, in short their debts are too large for them to afford, then the downward spiral to bankruptcy will be swift. And that is perhaps inevitable as markets gradually reprice risk back to more normal levels and perhaps higher.
Sabic is hardly a weak borrower, indeed it is one of the strongest. But the knock on effect from the lower end of the risk spectrum is pushing up borrowing costs across the board.
Corporate bond reversal
The riskiest debt is losing investor interest after returning about 70 per cent since the market lows of March 2009. In May junk bonds have lost 4.4 per cent. EPFR Global reports that investors pulled out $1 billion from high-yield funds in the third week of May.
The thinking among corporates like Sabic is that this market weakness will be short lived and recent volatility pass. But what if this is just the next phase of global deleveraging and becomes a downward cycle?
If you accept that interest rates are artificially low and currently mis-price risk for say junk bonds and emerging markets then logic suggests rising interest rates are about to produce a surge in corporate insolvencies around the world, and that emerging stock markets will crash.
2 Comments posted by readers:
According to the Telegraph newspaper in the UK, the money supply is dropping fast in the USA. I’m no expert, but I do remember stories of how, in rural areas, large bills virtually disappeared in the USA during the Great Depression, as the money supply shrank and shrank. A tale of someone handing a clerk a $10 bill in a small store, and a small crowd gathering to look at it, is burned into my memory.
I now see why one of those old economic writers on MarketWatch recommended that every American taxpayer be sent $ 3,000 on debit cards, to be spent within a year. Unless they US Government starts getting more money into circulation, a double dip is likely by next year. Once deflation starts, it is very difficult to stop. It can be extremely dangerous if it really gets going.
hmm i guess what will happen to the real estate companies, such as Dubai companies who are in high dept,,
what about Emaar? they will need cash for their real estate projects..
if Oil and Petro companies are finding it hard to find cash, while the oil price is some what strong,,, what do you think about other industries..
Ed Note: Emaar is the only developer without a significant debt problem – higher interest rates will be a major issue for some of them. This is the second stage of the downturn.