Risk is returning to credit marketRisky lending practices may already be creeping their way back onto Wall Street. Investors' pursuit of higher yield has led to a doubling in issuance of both investment- and speculative-grade bonds and loans in September, to $138 billion. Research from Standard & Poor's suggests that while that jump is a positive sign that credit markets have stabilized, it also signals that credit standards may be softening more quickly than is prudent.

The primary market for bonds and loans was averaging about $75 billion per month through August before its September spurt, according to S&P. The steady inflows of cash into bond funds and exchange-traded funds have also helped fuel the market. According to Dealogic, junk bonds have enjoyed a particularly vibrant resurgence: a record-breaking $275 billion in new issuance worldwide in the first three quarters of 2010, up from $163 billion during the same period last year.

Risk Is "Firmly on the Radar"

Diane Vazza, head of S&P's Global Fixed Income Research, said in the report that part of the volume increase stems from companies' ability to negotiate slightly looser covenants on term loans and fewer concessions on new debt issuance. "The strong investor demand for corporate bonds and loans has given issuers a bit more power to demand better terms," said Vazza.

As a result, she projected that, "It is possible that we will see a rise in risky deals, such as weaker companies funding dividends and acquisitions through debt offerings and an increase in leverage in LBO [leveraged buyout] deals. While we have yet to return to pre-recession excesses, investors' search for yield has put some of these risks back firmly on the radar."

S&P research suggests that with credit standards softening, more companies are starting to take on debt while it's cheap, regardless of whether such a move is critical to performance. Recently, AAA-rated Microsoft (MSFT) raised nearly $4.75 billion through debt issuance -- even though it had $37 billion in cash and short-term investments on its balance sheet. Many stronger companies have also taken on debt to finance share buybacks in an attempt to improve their stock performance.

Other trends that suggest risk is making a comeback in the credit markets include the sharp increase in leveraged loans (loans to companies with less-than-stellar creditworthiness) and the issuance of speculative-grade bonds, a.k.a. junk bonds. Through the first three quarters of 2010, leveraged-loan volume has jumped to $162 billion from $50 billion during the same period in 2009. Also, speculative-grade bond issuance among nonfinancial companies will surely set an all-time record this year. Already, nearly $120 billion of junk has been issued through the first three quarters of 2010, almost equal to the record $121.8 billion issued in all of 2007.

If credit trends continue to move in these directions, Vazza said it could be cause for concern. After all, a race to the bottom in credit standards was a primary spark for the financial meltdown that followed shortly after 2007's record-setting issuance.

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March 24 2011 at 8:32 AM Report abuse rate up rate down Reply
mark

The banks are NOT giving loans away, As a realtor I see banks making good people with 750+ scores being made to jump and do back flips to get a loan, I have a young married couple that have had to move there closing date 3 time due to the bank and its morons working in the closing department, Where is all the obummer money, Not for you or I, its the same old thing, The fat cats suck it all up and leave pennie for us.

October 11 2010 at 1:51 PM Report abuse rate up rate down Reply
donut999

no surprise and echo here we go again. believe it or not, alreay doing a here we go again in housing. the fha has taken over where fannie and freddie left off. with low interest rates the thresholds have dropped to where a couple can buy a $200,000 home with hardly anything down and marginal credit scores. they move it around, but believe under 640-660. that means dick and jane with a joint income of around $60,000-70,000, maybe a car payment, and reasonable revolving debt can buy the $200,000 house. plus the old old 28/36 (monthly housing cost/monthly total other obligations) has been boosted up to 50-55%. if either dick or jane lose their jobs, here we go again.

October 11 2010 at 11:43 AM Report abuse rate up rate down Reply
jkennedy806

Well here we go again, now that bottom out has occurred it's time to start building that bubble. Not me, never again. I went thru 2007, and now I am struggling thru this recession/depression & it's worse. But now I know what I need to do to protect myself. First NO BANKS Allowed. Maybe one credit card, would rather have none, but it set up that you need one. But we don't need 5 -- grow our own food, cause getting anything at the grocery store is expensive, and we don't know whose unwashed hands contaminated it. Be as self sufficient as possible. Cause we are driving the car into another crash. Oh the new precious metal copper. Alot of foreclosred older homes that are empty are being broken into and the pipes are litterally being ripped out of the walls

October 11 2010 at 9:08 AM Report abuse +1 rate up rate down Reply
lakeliquors

yes, as I can attest to my daughter who makes 31,000 just being given 40,000 in loans. two via credit cards, another automobile. Already has one credit card maxed. Hasn't the government/credit card companies learned anything the first time around.........

October 11 2010 at 8:26 AM Report abuse rate up rate down Reply
Robert & Lisa

Gold is again hitting all time new highs. Wonder if Platinum and Silver will soon follow? The super wealthy are flocking to Precious metals. What do they know we don't?

October 10 2010 at 10:22 PM Report abuse +2 rate up rate down Reply
1 reply to Robert & Lisa's comment
cmplx35

Rob & Lisa, what they know is that as long as the sweet talker's admin keeps the handouts (spending) going and Ben keeps those printing presses going full blast, our economy gets sicker and sicker: our economy is still in the hospital and those injections of money created out of thin air and hand outs are just injections of morphine that makes it feel good but fundamentally it remains in a delicate state. You see, much as I admire Ben, he fails to see the obvious. We can not have our economy operating at the pre-credit bubble(s) equilibrium. We can not magically create well paying jobs to keep aggreagate demand at pre-credit bubble levels, and to go back and keep aggregate demand at pre-bubble levels doesn't make sense because reality is reality and sooner or later it hit us on the face. Like I stated when the bubbles began to unravel, a new equilibrium has to be established where aggregate demand and aggreate supply are going to be in harmonoy based on effective demand and credit worthy folks and based on lower incomes because good manufacturing jobs are not goign to come back any time soon, especially with the prospect of a hostile tax environment because sooner or later the rubber is going to meet pavement. Here is a prediction: gold will hit $2000 some time in the third quarter of next year. Unless, Mr. Celebrity pulls a magic wand and makes those millions of good paying manufacturing jobs come back so that we can flood the world markets again with our goods like we did back in the 40s, 50s, 60s, and 70s: Our golden years when we were toasting with $3000 dls bottles of wine and the Chinese and the Indians were riding bicycles and we were driving our cadis, chevies and mustangs. I highly doubt it. But in the mean time let's keep trying to spend our way out of our recession to keep our economy from reaching a true equilibrium based on sound real fundamentals and let's create an environment that is conducive to wild bets and excessive risk taking because that left us good dividens for the last couple of years.

October 11 2010 at 4:33 PM Report abuse rate up rate down Reply