Thanks to Felix Salmon for pointing this tidbit out to us. Due to leveraged buyouts (notice how the press has started to use that 1980s term once again?), there has been a surge in junk issuance. But since below-investment-grade issuers pay only about 180 basis points more than investment grade issuers, there is virtually no penalty for being a dodgy borrower.
From the Times Online:
Almost half of corporate borrowers are now of junk-bond grade, according to the credit rating agency Standard & Poor’s.
Acquisitions by highly leveraged buyout vehicles have continued to reduce credit quality, as has investors’ strong appetite for higher-yielding paper.
Of the thousands of corporate bond issuers followed world-wide by Standard & Poor’s, 1,582 were investment grade and 1,571 speculative grade, according to its latest figures.
The agency said that this was the 22nd successive quarter in which junk grade had made inroads on investment grade.
“Speculative” grade or “high-yield” is the term that has taken over from “junk” to describe the securities of issuers graded below BBB.
Once considered only for the bravest investors and forbidden for some institutions, such as pension funds, junk is now mainstream because investors have become willing to risk more in search of higher yields.
S&P said that a recent spate of leveraged buyouts had led to companies slipping “multiple notches down” in credit quality.
The agency cited transport and telecoms as industries in which credit quality had declined markedly in recent years. Media and entertainment had the highest percentage of companies in junk territory – 83 per cent. Only financial, utility and property companies remained predominantly investment grade. Credit deterioration was most evident in America, and most issuers in Europe were still investment grade.