MARKETS - Renewed fears spark sell-off - A rout in junk bonds threatens the boom in corporate buyouts.
NEW YORK — The private equity boom that has helped drive the 4 1/2 -year-old bull market in stocks is facing severe pressure as investors chastened by the sub-prime mortgage debacle balk at financing risky deals.
Junk bond yields soared for a second day Tuesday to a nearly four-year high, reflecting the uneasiness of the market in which buyout firms are trying to sell nearly a quarter-trillion dollars of high-yield, high-risk securities to fund several big deals, such as the planned acquisition of Chrysler Group by Cerberus Capital Management.
The financing for a number of buyouts has been delayed or canceled in the last few weeks as investors have pulled back from buying the debt being offered. The $12 billion of new debt to be issued for the Chrysler deal also reportedly is facing resistance among investors. In other buyouts, companies have been forced to pay higher interest rates and offer other concessions to lure investors.
"The feeling in the market is, 'Why buy a deal today when next week I can buy it cheaper?' " said Stephen Carter, a high-yield bond analyst at Thomson Financial in New York.
The newly cautious dynamic represents an abrupt turnaround from last year and early this year, when what economists described as an excess supply of cash, much of it from overseas, made it easy for practically any company to borrow money at historically low interest rates.
In some cases, the money was lent without many of the safeguards that had historically protected investors against defaults.
Analysts attribute the change to growing losses in the value of securities backed by sub-prime mortgages amid rising defaults by home buyers with poor credit. In part, these analysts say, hedge funds and other institutions that invested heavily in such paper have been constrained by their losses from investing in high-risk corporate debt. More broadly, the sub-prime debacle has prompted investors in general to reevaluate their appetite for risky investments.
The retrenchment has sparked a debate about whether a "credit crunch" has taken hold that could damage the economy.
In his monthly investment newsletter, Bill Gross, the widely followed bond-fund manager at Pacific Investment Management Co. in Newport Beach, said "the sudden liquidity crisis" in the junk bond market showed there was "a chain that links all markets and ultimately their prices and yields to the fate of the U.S. economy."
