Debt Markets’ D-Day

Date: Friday, July 27, 2007
Author: Trader Daily

Debt markets have officially met their perfect storm: Chrysler and Alliance Boots failed to find buyers this week for $20 billion of loans – a clear death knell for other deals in the global pipeline – while Blackstone’s shares have fallen 17% below their IPO price. On cue, corporate bond risk has soared to a new record high. Is this the nail in the coffin?

The risk of owning bonds in Europe soared by a record as investors around the world fled corporate debt, according to credit-default swap traders.

A sell-off in the U.S., Asia and emerging markets extended to Europe, where the cost to protect company debt approached the record high in 2005 when General Motors Corp. and Ford Motor Co. lost their investment-grade credit ratings. Deutsche Bank AG's risk premium jumped to five times the amount on June 1.

Investors, whose confidence has been sapped by losses from U.S. subprime mortgages, are shunning corporate debt, causing more than 40 companies worldwide to reorganize or abandon borrowing plans in the past month. The retreat forced banks to take on debt totaling more than $32 billion that they had planned selling.

"This is not going to be a short affair," said V. Anantha-Nageswaran, head of research for Asia at Bank Julius Baer (Singapore) Ltd. "By the time it ends, in three to four years, people will not want to hear of financial markets or real estate." Julius Baer Holding AG is Switzerland's biggest independent money manager.

Credit-default swaps based on 10 million euros ($13.8 million) of debt included in the iTraxx Europe Series 7 Index of 125 companies with investment-grade ratings jumped 10,000 euros to as much as 57,000 euros at 9:45 a.m. in London, according to Royal Bank of Scotland Plc. The increase is the biggest of any one day since the index was created three years ago. It's approaching the peak of 60,000 euros in May 2005.

 (Continue reading this story on Bloomberg)