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Wed Sep 30, 2015, 10:35 AM

Next Shoe to Drop on Stocks? Junk-Bond Meltdown Hits M&A

Next Shoe to Drop on Stocks? Junk-Bond Meltdown Hits M&A
by Wolf Richter • September 29, 2015

It’s not like stocks need any additional problems. But they’re getting them.

On Monday, junk bonds suffered their worst sell-off since October 6, 2011, according to S&P Capital IQ LCD’s index of “high-yield flow names.” The index is comprised of large junk-rated companies, including Charter Communications, Chrysler, Dish Network, Dollar Tree, First Data, Reynolds Group, Rite Aid, Sprint, and Valeant Pharmaceuticals.

The average bid plunged 246 basis points from 94.44 cents on the dollar to 91.98. The worst plunge and the worst level since that infamous October 6, 2011, when a flare-up of the euro debt crisis wreaked havoc in the global markets. The average yield jumped to 8.62%. Almost all of the components of the index were in the red. LCD:

This time around, declines are linked to ongoing concerns about global economic growth and the commodities crunch, with the latter, in particular, forever defining the state of play for late 2015. The decrease builds on a 186 bps retreat on Thursday, for a net-432 bps decline week over week, and it follows negative observations more mildly in the prior three readings, for a decline of 578 bps dating back four weeks.

It was the day when the index crashed through the oil-panic-low of December 16, 2014. But this time, the sell-off is broader. Today, there was a tepid uptick, not the violent bounce seen the day after October 6, 2011.

Here’s how the junk-bond debacle bleeds into stocks. Part of the fuel that powered stocks to such vertiginous heights over the last few years was the M&A boom. Companies bid for each other with huge premiums over the already inflated stock prices. These deals were mostly funded with shares, of which companies could print an unlimited amount, and with debt, of which even over-indebted junk-rated companies could issue nearly unlimited amounts, thanks to the Fed’s policies that drove yield investors to near-insanity. ................(more)


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