Crunch Reminds Investors That Slowdowns Carry a Price
The realization that Sunbeam (SOC), a company once loved on Wall Street and now trading for pennies, might find it difficult to pay off something like $2.4 billion in debt has set off a flurry of worrying among investors.
The stocks of two banks that participated in a $1.7 billion syndicate loan to Sunbeam in March 1998, First Union (FTU) and Bank of America (BAC), have fallen under heavy pressure over the past two trading sessions. And inevitably, the market is jittery over the possibility that other banks will see big debts go sour. Particularly hard hit today were regional banks -- outfits like Bank One (ONE), Wachovia (WB) and KeyCorp (KEY) -- which lack the diversity of their larger cousins.
It's not for nothing that the market is worrying. The Sunbeam loan -- along with this week's Chapter 11 filings from competitive local exchange carrier ICG Communications (ICGX) and bed and bath furnishings maker Pillowtex (PTX) -- has reminded investors that economic slowdowns come with a price.
Lagging IndicatorsWhen the economy is flush, as it was so spectacularly until relatively recently, cash is not a hard thing to come by. Everybody is doing well, and there's a feeling that the good times will continue. Creditors become a little less stringent, and loan growth accelerates. Your lay-about brother gets a loan for a new truck, and the corporate equivalents of your brother -- companies like Pillowtex -- get loans, too.
|Credit Trouble? |
Commercial and industrial delinquencies as a percentage of outstanding debt, quarterly
|Source: Federal Reserve.|
High-yield debt issuance, in millions of dollars
|Source: Thomson Financial Securities Data|
Sanford and SonSo far, it has been the junk-bond market where the tightening credit environment has had the greatest measurable effect. With the ballooning of yields, the issuance of high-yield debt has all but dried up. This has a knock-on effect -- companies that were depending on the high-yield market to finance their way to profitability are running into financing troubles. Particularly hard hit in the high-yield market have been CLECs like ICG and GST Communications, which was also driven to bankruptcy. And those high-profile bankruptcies themselves have hurt the high-yield market. "The percentage of distressed issues in the high-yield universe has grown and driven average yields, and thus spreads, wider," says Bear Stearns high-yield analyst Mike Taylor. "About a quarter of the market is now distressed."
|Bigger and Wider |
Merrill Lynch High-Yield Master Index yield,
with spread vs. 10-year Treasurys
|Source: Merrill Lynch|
|Tailing Off |
Year-over-year loan growth
|Source: Federal Reserve|
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