As Credit Bubble Grows, Junk Bond Underwriting Fees Drop To Record Low

Tyler Durden's picture


Back in February, Fed governor Jeremy Stein warned of overheating (read: bubble conditions) in credit markets. Nobody cared. A few months later, while observing among other things the ongoing credit bubble, none other than the central banks' central bank said the "central banks must head for the exit and stop trying to spur a global economic recovery" and that the "monetary kool-aid party is over." It wasn't, and naturally nobody cared either - as we would find out a few months later the party would go on as it turned out banks have no other choice but to keep the kool-aid flowing. Then over the weekend, just in case, the BIS tried once again, this time "sounding the alarm over record sales of PIK Junk Bonds" combining what it said previously together with Jeremy Stein's warnings (of course, nobody would care this time either).

Bloomberg summarized the BIS report (linked) as follows:

Record sales of high-yield payment-in-kind bonds are triggering uneasiness among international regulators concerned that investors may suffer losses when central banks tighten monetary policy.


Issuance of the notes, which give borrowers the option to repay interest with more debt, more than doubled this year to $16.5 billion from $6.5 billion in 2012, according to data compiled by Bloomberg. About 30 percent of issuers before the 2008 financial crisis have since defaulted, the Bank for International Settlements said in its quarterly review.


Companies are taking advantage of investor demand for riskier debt as central bank stimulus measures suppress interest rates and defaults approach historic lows. The average yield on junk-rated corporate bonds fell to a record 5.94 percent worldwide in May, Bank of America Merrill Lynch index data show, while global default rates dropped to 2.8 percent in October from 3.2 percent a year earlier, according to a Moody’s Investors Service report.


Low interest rates on benchmark bonds have driven investors to search for yield by extending credit on progressively looser terms to firms in the riskier part of the spectrum,” according to the report from the Basel-based BIS. “This can facilitate refinancing and keep troubled borrowers afloat. Its sustainability will no doubt be tested by the eventual normalisation of the monetary policy stance.”

Warning, shmarning: the truth is that as long as the Fed continues pushing everyone into the riskiest assets (so essentially forever), the demand for High Yield, aka Junk Bonds will rise. Although technically, "High Yield" is no longer the appropriate name for the riskiest credit issuance since the average coupon has declined to where Investment Grade used to trade in the years before the New Normal. It is therefore only appropriate that as part and parcel of this record high yield bond issuance surge levering the riskiest companies to the gills with low interest debt, that there is also a scramble between underwriters to become as competitive as possible. And, sure enough, as Bloomberg Brief reports, "the underwriting fees disclosed to Bloomberg on U.S. junk bond deals average 1.276 percent for the year to date, the lowest since our records began. The prior low was set in 2008, when fees averaged 1.4 percent." 2008... that was when the last credit bubble burst on unprecedented demand for junk bonds: we are confident the bubble apologists will find some other metric with which to convince everyone that reality, and the Fed's Stein, have it all wrong.

In the meantime, this is what a real bubble, if not so much in underwriting fees, looks like.

And by underwriter:


Finally, as a courtesy reminder what happened the last time the credit bubble hit such epic proportions, here again is the BIS:

The trend towards riskier credit was fairly general. It spurred, for example, the market for payment-in-kind notes. …This rise occurred despite evidence of the riskiness of payment-inkind notes: Roughly one third of their pre-crisis issuers defaulted between 2008 and mid-2013.

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Mon, 12/09/2013 - 11:36 | 4229127 firstdivision
firstdivision's picture

As Junk Bond bubbles grow, TWTR flys to da moon!

Mon, 12/09/2013 - 12:04 | 4229200 Serfs Up
Serfs Up's picture

What could possibly go wrong?

Mon, 12/09/2013 - 12:43 | 4229341 NoDebt
NoDebt's picture

In a PIK/Toggle junk bond?  Nothing.  Absolutely nothing.  Any similarity to a Payment Optional ARM mortgage on the retail side of the debt world is purely a result of your over-active imagination.

Mon, 12/09/2013 - 11:41 | 4229143 Peter Pan
Peter Pan's picture

In other words we are witnessing more sub prime issuance and the deflation in underwriting fees is a sign that even bankers have now turned on each other given that there are now limits as to how much they can strip their clients of.

A further dsaster in the making.

Mon, 12/09/2013 - 11:50 | 4229162 RSloane
RSloane's picture

What is the difference between my paying an Amish farmer for two chickens with rose bush cuttings versus financial houses paying each other with in-kind payments?

[other than the obvious my exchange with the Amish farmer has real value backed by true tangible assets]


Mon, 12/09/2013 - 11:52 | 4229174 Peter Pan
Peter Pan's picture

Exactly. Americans thought they could grow rich by lending to snd borrowing from each other while allowing the Chinese to make things for them.

Mon, 12/09/2013 - 11:58 | 4229184 kaiserhoff
kaiserhoff's picture

You must be a terrorist.

How dare you pay attention to money.  Oh look, Miley Cyrus just farted!

Mon, 12/09/2013 - 12:04 | 4229201 Peter Pan
Peter Pan's picture

One must eat in order that they may be able to fart. I can foresee a great decrease in farting the way things are going.

Mon, 12/09/2013 - 11:44 | 4229146 asteroids
asteroids's picture

When the credit bubble pops, the boyz will take down everybody as they have been setting up shorts to offset their losses in credit. Some muppets are getting wise.

Mon, 12/09/2013 - 11:55 | 4229179 eroc66
eroc66's picture

......gentlemen prefer bonds?.......Heavy Bondage to the tune of "They are Coming to Take Me Away Ha Ha!"..

Mon, 12/09/2013 - 12:00 | 4229189 kaiserhoff
kaiserhoff's picture

Always liked that song, in part because it pisses so many people off.

PS.  In case you hadn't noticed, we are both older than dirt;)

Mon, 12/09/2013 - 11:59 | 4229181 Dr. Engali
Dr. Engali's picture

But it's different this time.....In a bankrupt society it's all fucking junk.

Mon, 12/09/2013 - 12:43 | 4229346 SmallerGovNow2
SmallerGovNow2's picture

Be a whole lot of toilet paper available when TSHTF...

Mon, 12/09/2013 - 11:59 | 4229187 buzzsaw99
buzzsaw99's picture

here i sit all broken hearted

tried to shit junk bonds but only farted

Mon, 12/09/2013 - 12:58 | 4229410 TheFreeLance
TheFreeLance's picture

Very telling metric. Taper to $100m. soon.

Mon, 12/09/2013 - 13:07 | 4229442 starman
starman's picture

Let's just see what Leisman and the chipmunks will say about this.
Oh sorry how could I forget Cramer or is it creamer?

Mon, 12/09/2013 - 13:08 | 4229448 pragmatic hobo
pragmatic hobo's picture

when shtf it's gonna hurt ...

Mon, 12/09/2013 - 16:14 | 4230198 Randoom Thought
Randoom Thought's picture

I guess the Fed will be loading another ink cartrigde so that they can print checks for the purchase of junk debt that defaults.

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