The Junk Bonds of Magical Thinking
It's not as if finance is at a loss for mysteries these days: We're having trouble explaining everything from last week's flash crash to the subprime crisis of 2007. But even among the chaotic tentacles of financial mysteries, there is one conundrum that I find particularly vexing: Current pricing of junk bonds and leveraged loans. Leveraged loans have returned 5.25% this year, according to Standard & Poor's LCD loan index. Bloomberg says junk-bond underwriting has quadrupled so far this year compared to the same time in 2009, to $91.8 billion. Since the Freeze of 2008, demand for leveraged loans jumped nearly 70%; the resurgence of big buyout talk shows the willingness of banks to lend to private equity firms. Silver Lake and Warburg Pincus will borrow $2 billion of IDC's $3.4 billion pricetag. Financing is so easy that even the much-maligned dividend recap is back. S&P Leveraged Commentary and Data shows that LBO financing increased by 15 times this year so far compared to the same time in 2009.
