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Why Carl Icahn Is Betting Big On This Move

High Yield Spread

Quite a few people emailed me and asked me to expand a little bit on this post Carl Icahn: A Matter Of Time Before Stocks Implode  Particularly, what Mr. Icahn meant by stating that the High Yield spread is probably the best investment opportunity today.

Take a look at the 2007-2009 spike in junk spreads on the chart above. That is what happens when any idiot and even dead people can get a $1 Million mortgage to speculate in the real estate market. A few people, including Carl Icahn, made a huge amount of money from this move.

Today, we have an identical situation. Junk yields should not be this low. Yet, because interest rates are at zero and the FED has flooded everything with liquidity, anyone can get a loan. For instance, corporates who should not be able to get a loan, due to their inability to ever repay, are able to borrow massive amounts of money at 5% or below. That will eventually blow up. Just as it did in 2007-2009.

That is to say, Carl Icahn expects a similar move to what we saw at that time. I would have agree with his assessment. And when it does develop, a leveraged position might lead to massive gains once again. The only question is, WHEN?

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Why Carl Icahn Is Betting Big On This Move Google

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Junk Bonds Surge Past 2007 Top. What It Says About The Stock Market Is Beyond Disturbing

As per Bloomberg report below, a total of $85 Billion in junk loans have been raised this year to finance acquisitions, topping 2007’s record pace.  This should not come as a surprise to the readers of this blog. While most market pundits will see this as a positive economic development, it is anything but that.  It is a symptom of the financial system that has gone awol.

A system where the Central Bank and the US Government encourage speculation and massive asset bubble creation. A system where the capital is miss allocated and only the rich benefit. Unfortunately, this sort of a financial stupidity can only lead to one thing. An eventual collapse of our financial system and a severe US Recession. As such, you should not view this “Junk Bond” surge as anything other than a proverbial market TOP Bell. 

This is further confirmed by our mathematical and timing work showing a severe bear market between 2014-2017. If you would be interested in learning when such a bear market will start (to the day) and it’s internal composition, please Click Here. 

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Junk Bonds Surge Past 2007 Top. What It Says About The Stock Market Is Beyond Disturbing Google

Bloomberg Writes: Junk Buyout Loans Eclipse ’07 Record in Dealmaking Frenzy 

The U.S. junk-loan market has never fueled so much dealmaking.

A total of $85 billion of loans have been raised this year to finance acquisitions, topping 2007’s record pace, data compiled by Bloomberg show. Issuance is set to accelerate as Avago Technologies Ltd. locks in the year’s second-biggest loan for its takeover of chipmaker LSI Corp. as soon as today and Men’s Wearhouse Inc. (MW) borrows $1.1 billion to fund its deal for Jos. A. Bank Clothiers Inc.

Leveraged loans are booming as the value of takeovers in the U.S. reaches levels last seen in 2008. While regulators have warned excesses may be emerging in riskier parts of the market as the Federal Reserve’s zero-interest rate policy extends into a sixth year, the loan surge underscores renewed confidence in the ability of the least-creditworthy companies to expand as the world’s largest economy strengthens.

“There’s a lot of money waiting to be put to work,” Judith Fishlow Minter, co-head of U.S. loan capital markets at Royal Bank of Canada, said in a telephone interview from New York. “The market is exceptionally strong.”

Acquisition Debt

Acquisition financing accounted for 29 percent of the $20.5 billion in leveraged-loan issuance this month, rising from 20 percent of overall borrowings in March, according to a JPMorgan Chase & Co. report dated April 11.

The bank is arranging the loan for Houston-based Men’s Wearhouse, which has a B+ rating atStandard & Poor’s, or four levels below investment-grade. The retailer’s Ba3 junk rating from Moody’s Investors Service is one step higher.

Leveraged loans are rated below Baa3 by Moody’s and lower than BBB- at S&P.

“It’s great from a shorter-term perspective to see more supply,” Jamie Farnham, who manages about $7 billion of high-yield bonds and leveraged loans for Los Angeles-based TCW Group Inc., said in a phone interview.

“From a longer-term perspective it’s indicating that you’re in a later part of the cycle,” Farnham said. “This is the time where you shift up in credit quality.”

Private-equity firms are using more debt to finance buyouts.

Rising Leverage

First-lien borrowings at speculative-grade companies equaled 4.2 times their earnings before interest, taxes, depreciation and amortization in the first quarter, the highest since the 4.6 ratio in the last three months of 2007, according to S&P Capital IQ Leveraged Commentary & Data.

A total $760 billion in mergers and acquisitions of U.S. companies were announced in the year ended March 1, according to data compiled by Bloomberg. That’s the most for a 12-month period since April 2008.

“Markets are extremely accommodating for M&A financing,” John McAuley, co-head of U.S. Leveraged Finance at Citigroup Inc., said in a phone interview. “We expect that conditions will remain favorable for some time.”

The $4.6 billion loan being raised by Avago is the biggest since the one obtained by Community Health Systems Inc., a U.S. hospital chain, in January to help fund its $7.6 billion purchase of Health Management Associates Inc., Bloomberg show data show.

The takeover was the largest of a hospital company since 2006, when HCA Holdings Inc. (HCA) was acquired by private-equity firms including KKR & Co. for about $33 billion including debt.

“We’re not in an environment that some could argue we were in pre-crisis,” said McAuley. “Today’s market is still exercising discipline.”

Fund Inflows

The Fed has kept its benchmark rate close to zero since December 2008 to help support an economic recovery after the collapse of Lehman Brothers Holdings Inc. deepened the worst recession since the Great Depression.

After inundating the U.S. economy with more than $3 trillion, the Fed began reducing stimulus by scaling back its monthly bond purchases this year.

Individuals have made deposits into funds that buy junk loans for 95 straight weeks, including a record $63 billion in 2013, according to JPMorgan. The funds this year have attracted $7.8 billion, with last week’s inflow of $48 million being the smallest since July 2012.

‘Hot’ Demand

The loan for Men’s Wearhouse is covenant-light, meaning it lacks financial maintenance requirements that, when violated, can give lenders an opportunity to negotiate with the borrower. About two-thirds of loans this year are without such protections, rising from about half in 2013, according to JPMorgan.

Covenant-light lending is on the rise as the global default rate for speculative-grade corporate debt is projected to decline to 2.2 percent at the end of this year, from 2.3 percent at the end of March, according to an April 7 report from Moody’s. The forecast is below the historic average of 4.7 percent, based on data going back to 1983.

“There’s enough demand for virtually any deal,” John Fraser, a managing partner at 3i Group Plc’s U.S. debt business, said in an interview at the firm’s New York office.

The rise in acquisition loans gives lenders more opportunity to be selective in a “hot” market, according to Fraser, who oversees $3.8 billion of U.S. credit assets for the London-based private-equity firm.

Careful Investing

The Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency updated guidance on lending to speculative-grade borrowers about year a ago, citing “deteriorated” standards and the willingness of investors to accept looser terms.

“You just have to be very careful,” Beth Maclean, a bank loan manager at Pacific Investment Management Co., said in a Bloomberg radio interview on April 11. “There are more aggressive deals being done.”

Collateralized loan obligations, the biggest buyers of junk loans that fueled the 2005-2007 buyout boom, will raise as much as $90 billion in 2014, the most in seven years, based on a forecast fromWells Fargo & Co. this month.

Deals done before the financial crisis were “incredibly large,” with private-equity firms grouping together to back a single buyout, said RBC’s Fishlow Minter.

The strongest single quarter on record for merger loans was when $118 billion were raised in the last three months of 2007, Bloomberg data show. That was the same time when Energy Future Holdings Corp. got more than $20 billion of loans backing its $48 billion buyout by KKR, TPG Capital and Goldman Sachs Capital Partners, Bloomberg data show.

The Texas utility, formerly known as TXU Corp., is negotiating a plan with creditors that would reduce the time it takes to reorganize under bankruptcy protection.

Lenders are still looking for more opportunities to invest in M&A financings and LBOs, according to Citigroup’s McAuley.

“They are overwhelmed with refinancing opportunities, and underwhelmed with strategic financing opportunities” he said.

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Junk Bond King Runs Away From Junk. Should You?

According to Merrill Lynch worldwide junk bond market surged from $1 Trillion to $2 Trillion in under 5 years. Instead of being the disease this is yet another symptom of FEDs insanely loose monetary policy. Jeffrey Gundlach is right on target when he says “They’ve squeezed all the toothpaste out of the tube.”  Said spread has now dropped below 400 basis points (4.0 percentage points) to 397 basis points, according to the latest reading on a benchmark Bank of America Merrill Lynch high-yield index.

In June 2007, at the peak of the last credit cycle, it bottomed at an all-time low of 240 basis points; during the depths of the financial crisis, it approached two thousand basis points. The historic average is a bit below 500 basis points, and spreads have held reliably above 400 bps for the past half-decade or so, even as junk bond yields set new historic lows in 2013 and 2014. Again, when the bear market of 2014-2017 starts and accelerates you will see a number of massive Junk Bond blow ups. Buyer beware. The risk does not justify the return. 

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Junk Bond King Runs Away From Junk. Should You? Google

 Junk Bonds at $2 Trillion as Gundlach Pulls Back: Credit Markets

The junk-bond bonanza that’s doubled the market to almost $2 trillion since the credit crisis has Jeffrey Gundlach heading toward the exit.

Less than 12 months after saying theFederal Reserve’s stimulus and a plunge in defaults would support the market for speculative-grade debt for another four years, the head of DoubleLine Capital LP is trimming its allocations. With borrowing costs for the least-creditworthy companies approaching a record low, junk bonds no longer provide enough of a buffer from rising Treasury yields as the Fed scales back its bond buying, said Gundlach, whose firm oversees $49 billion.

“They’ve squeezed all the toothpaste out of the tube,” the bond manager said in a telephone interview from Los Angeles. “There is interest-rate risk that’s just being masked by fund flows holding up the prices of junk bonds.”

Without that money moving in, he said, “if they start to suffer losses, you really wonder who’s going to buy them.”

Junk bonds, which have returned 148 percent since the end of 2008, are showing signs of froth as five years of easy-money policies by central banks caused investors to pour unprecedented amounts of money into the high-yield market. That’s helped push the amount of junk bonds worldwide to $1.97 trillion from less than $1 trillion in March 2009, Bank of America Merrill Lynch index data show.

Cutting Allocation

DoubleLine cut its allocation to speculative-grade debt in its $1.8 billion Core Fixed Income Fund to 3 percent at the end of last month, compared with the firm’s expected average of 10 percent, said Gundlach, who last April predicted “junk bonds will do OK” for the next four years. The fund has outperformed 90 percent of its peers in the past three years, a period during which yields on junk bonds globally reached a record-low 5.94 percent last year, according to data compiled by Bloomberg.

Improvements in the job market and economy spurred the Federal Open Market Committee to trim monthly bond purchases by $10 billion in each of its past two meetings. The central bank in January reduced its bond buying to $65 billion.

Investors have deposited more than $27 billion into U.S. funds that buy junk bonds since 2009, according to TrimTabs Investment Research. Even after the inflows slowed last year to the weakest pace during that period, they’ve bounced back this year. After pulling $1.2 billion out in December and January, investors have since funneled $1.4 billion back into the funds, the data show.

‘Very Rich’

“The market’s very rich, valuations are lackluster and there’s very little margin for error,” said Edinburgh-based Steve Logan, the head of high-yield at Scottish Widows Investment Partnership, which manages about $242 billion. “We’ve lightened up, taken profits. Yields and cash prices on the asset class haven’t anywhere much to go now.”

The global market for speculative-grade debt, rated below Baa3 by Moody’s Investors Service and BBB- at Standard & Poor’s, is poised to surpass $2 trillion in a matter of weeks, according to the Bank of America Merrill Lynch Global High Yield Index. That gauge, started Dec. 31, 1997, took 12 years to reach $1 trillion.

Junk-rated companies have issued $59 billion this year, after a record $380.2 billion last year, according to data compiled by Bloomberg.

Default Rate

“When things are rollicking and the market is permitting low-quality issuers to issue debt, that’s when you need a lot of caution,” Howard Marks, the founder and chairman of Oaktree Capital Group LLC, the world’s largest distressed-debt fund, said Feb. 28 in a telephone interview. “We know which way the tide is going, and we know it won’t go that way forever, but we never know when it will turn.”

The speculative-grade global default rate is forecast to reach 2.1 percent in December, down from 2.9 percent at the end of 2013, according to a Moody’s note March 7. Default rates in Europe will fall to 5.2 percent next year, from 5.9 percent at the end of 2013, according to S&P.

At the same time, investors are demanding fewer protections. A measure of covenants on speculative-grade debt in North America were at weakest level in at least three years last month, Moody’s said in a March 11 report. A gauge of covenant quality that increases as investor protections deteriorate climbed to 4.36 last month from 3.84 in January, reversing three months of improvement. The ratings firm measures covenants on a scale of 1 to 5.

‘Lax Underwriting’

“The seeds of the high-yield demise are being sown with some lax underwriting,” said Anthony Valeri, a market strategist in San Diego with LPL Financial Corp. “But that probably won’t be a problem in the form of higher defaults until late this year.”

Yields on dollar-denominated debt rated CCC or below have fallen to 9.7 percent through yesterday, Bank of America Merrill Lynch index data show. That’s 3.7 percentage points below than the average of the past decade, the data show.

Buyers demanded 3.78 percentage points more than similar-maturity Treasuries to own U.S. junk bonds on March 5, the least since 2007, the data show. That’s not enough, according to Martin Fridson, chief executive officer of FridsonVision LLC, a New York research firm specializing in high-yield debt.

“We’re at an extreme over-valuation,” he said in a telephone interview. “When you’re not compensated adequately for the risk, you do tend to get punished for it. If the Fed is still sufficiently energetic about it, they could keep it at an over-valuation through all of 2014.”