Was that a top in the high yield market?

On January 27th, I wrote a post in the Distressed Debt Investors Club Forum (available to members only) entitled: "Top?" in which I commented that if the Ryerson's discount note offering, that was used to fund a dividend to Platinum equity, priced to yield a little over 16% was not excessive, then I really do not know what is.

Members of the DDIC have known I have been bearish for the last few months. When new issue market is a storming, I go a-running. We have played probably 15% of the deals that have come to both the high yield and leveraged loan markets in the past three months. Now admittedly, when the market started to open up in June, some issuers were bringing reasonably priced deals to the market with reasonable covenant packages.

Then things got ugly.

But, as investors, we are the only ones to blame. You can't blame the issuers: They want to lock-in long term financing that is anything but restrictive. You can't blame the bankers: They want to lock in their risk less fees. And you can never blame the sponsors: They are the ones that will suck high yield and leveraged loan investors dry if they get the chance.

In November / December, new issues were breaking two or three points above new-issue price. And then everyone was playing the flip. And order books continued to swell - and larger funds (including index funds) had to pad their orders to get the allocation they wanted / felt like they deserved. And the order books swelled some more. Vicious cycle. And as a high yield investor, you look at these new issues trading at 105 or 106 and say: "Where did I/we go wrong here"?

So, I have continued to focus my attention back to distressed / stressed high yield and other ancillary opportunities where the upside/downside is better suited than buying a poorly structured, deeply subordinated high yield bond. In addition, I have really laid into my shorts over the past few weeks. Wouldn't mind a correction to hit the reset button on all these easy money made over the last five or six months.


tom brakke 2/09/2010  

I agree completely with your thesis. It's not the issuers and it's not the dealers, but the buyers who ought to be maintaining market discipline.

I wrote a piece on that theme last year as part of a series on misaligned incentives in the financial markets (that posting was called one hand clapping). It is still amazing to me that the buyers of the questionable paper never got tarred and feathered as commentators looked for contributors to the financial crisis.

Without institutional buyers of schlocky stuff, it doesn't get created.

Anonymous,  2/10/2010  

As a non-trader, I really could not understand the slang and jargon in this post.

jonsmit 2/10/2010  

It is tremendous ,i agree with it.

rwmcpar 2/10/2010  

Anon, It is tough sometimes. This blog a little more than others. What parts are you having problems on? I'll do my best to help.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.