High-yield bond market set for record boom.
FALLING yields are expected to lure shipowners to re-enter the junk bond market in New York and Europe in record numbers this year, raising more money than 10 years ago.
There would be ?significant activity in the high-yield bond market in shipping?, in 2010 said Hamish Norton, investment banking managing director for New York investment bank Jefferies & Co"s maritime group. ?I would not be surprised if 2010 was a record year,? he added.
January saw a sharp rise in investor fund allocations to the high-yield bond market, which coincided with over-leveraged shipowners being unable to raise equity and seeking out alternative forms of long-term capital to pay down debt.
The window was also open for European shipowners to tap the high-yield bond market, Mr Norton said, with a record $9bn in high-yield bonds set to be issued in Europe in January. ?The European bond market, which lagged behind the US bond market, has now pretty well caught up,? he said. ?For a European-based shipping company, the European bond market we now think is an option.?
Issuers of high-yield bonds in Europe did not require anything as ?tedious and difficult? as the US, which mandates registration with the Securities Exchange Commission.
?The drawback of the European bond market for shipping issuers is that the investors are less familiar with the shipping industry and would require significantly more education,? Mr Norton said.
?They might not be as confident in their judgement of the credits and therefore there may be a slight cost premium for shipping in Europe as opposed to shipping in the US. That is yet to be tested, however.?
Based on talks with investors in Europe, Mr Norton said an issuer with ?single-B rated? debt, as opposed to ?double-B rated?, would be advised to issue a secured bond. In the US market, issuers with a single-B rating could issue an unsecured bond, but this was not thought to be available in Europe.
The first trickle of shipping"s high-yield bonds began to be issued in late 2009 in New York, with General Maritime and Navios Maritime Holdings among the handful to tap the market.
Mr Norton said existing high-yield bonds had been accorded a lower interest rate because the economic recovery signalled a lower perceived default risk. The market price had come down by 100 basis points over the last month.
?We are seeing all sorts, both strong public companies and smaller private companies,? Mr Norton said of shipping interest in high-yield bonds.
The shipping industry emerged tarnished in the junk bonds market in the 1990s, after all but a handful of companies defaulted, some only months after the bonds had been issued.
Some $2.2bn-$2.5bn was raised at the top of the shipping junk bond boom in 1999.