Bloomberg - Junk-Bond Losses Pile Up as Traders Flee Any Whiff of Bad News

by  Sridhar Natarajan and Laura J Keller
November 24, 2015

The morning after cancer-center firm 21st Century Oncology Inc. cut its earnings forecast for 2015 last week, money manager Rajay Bagaria woke up to find his holdings of the junk-rated company’s bonds had lost 19 percent of their market value overnight.

Investors who own Chesapeake Energy Corp.’s $11.3 billion of bonds watched about a third of their value disappear over the past three weeks. Similar free-falls have appeared on the computer screens of traders in debt of retailer Men’s Wearhouse Inc., gambling-equipment maker Scientific Games Corp. and the owner of New York Sports Club. By one measure tracked by Deutsche Bank AG analysts, the debt of the riskiest companies is selling off at four times the rate of the least-risky junk borrowers -- a ratio that’s typically 1.6 times.

Investors in the debt of junk-rated companies are showing little patience for even the slightest whiff of bad news as they seek to shield themselves from the market’s first annual loss since 2008. With the Federal Reserve poised to lift interest rates next month and a deepening commodities slump stirring fears that earnings growth will be squeezed, price swings in the market are intensifying. To Wasserstein & Co.’s Bagaria, it’s creating a combustible environment that’s starting to remind him of the last credit crisis.

"It almost feels like 2008 a little bit,” said Bagaria. "When companies underperform, the amount their debt can trade off is much greater than ever before. And then there’s the fear of illiquidity."

Small Dominoes

Investors are shunning the lowest-rated junk bonds. That is underscored by the extra yield that investors are demanding to hold CCC rated credits relative to those rated BB. This has jumped to the most in six years.

With confidence slipping in the strength of the global economy, there are fewer investors to take the opposite side of a trade in the riskiest parts of the market, according to Oleg Melentyev, the head of U.S. credit strategy at Deutsche Bank.

"These are all small dominoes in one corner of the market," Melentyev said. "In the early stage, all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle.”