Rising Junk Yields Could Stall M&A Activity

Fear has returned to the debt markets in a big way.  Moody’s anticipates an uptick in the global default rate, from the current 1.5 per cent to 1.8 in 2012.  

Bloomberg reports that European junk bond yields have topped 10 per cent for the first time this year.  With the spread between junk bonds and German bunds up 68 per cent, to 800 basis points from 476 in April, the risk premium demanded by the markets has shot up enough to potentially render some previously attractive deals unworkable.

Norval Loftus of Allegra Investment Management opined that companies in “challenged circumstances” could find their access to debt financing cut off at any yield as the market.

Since the markets began to recover in 2009 there has been more optimism than evidence for a broad based recovery throughout the developed world.  The stinging realisation that the sovereign debt crisis in the euro zone will not be addressed through the issuance of euro bonds may prove to the catalyst that shifts the orientation of debt markets from one of yield-chasing and risk-embracing to one of severe risk-aversion.

About the author:

David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].