Bombardier, Inc. : Equity Selloff Shakes Up Junk-Bond Market

11/15/2012| 04:23pm US/Eastern

   By Patrick McGee  

The postelection stock selloff is proving contagious.

The Standard & Poor's 500-stock index has declined 5.3% since President Barack Obama was re-elected on Nov. 6, and debt from high-yielding companies is now suffering, too.

"The closest thing in fixed-income to equity is high-yield, so it's taking a hit," said Michael Mutti, credit strategist at Stifel, Nicolaus & Co. "It's not panic selling, but some people are taking chips off the table."

Total returns on below-investment-grade bonds--also known as high-yield or "junk" bonds--have fallen 0.57% since the election results, according to a Barclays index. Compared with returns on equities, that is a small decline. But bond spreads--the extra yield these bonds pay compared with safe-haven Treasurys--widened by 0.50 percentage point from Oct. 22 through Wednesday. That was the sharpest increase since spreads widened 1.24 percentage points from May 3 to June 5.

More pessimistic news on the U.S. economy or the European debt situation could prolong this slump and push spreads another 0.75 percentage point wider, driving the market into its worst downturn this year, said Marty Fridson, chief executive of New York financial-research firm Fridson Vision LLC.

High-yield bonds have rallied for most of the year, delivering a total return of more than 12.8% since Jan. 1 despite a series of unexpected global events. But that has pushed bond prices to rich levels that make them "vulnerable," Mr. Fridson warned clients via email Thursday.

Exchange-traded funds reflect the uncertainty. Investors pulled $711 million out of junk-bond ETFs from last Thursday to Wednesday, marking the second-largest weekly outflow since 2008, according to J.P. Morgan Chase & Co.

Junk bonds tend to mimic moves in the equity market, so some investors say a junk selloff is no surprise as investors focus on the looming fiscal cliff--automatic tax increases and spending cuts that could drive the economy into a recession if Congress doesn't act.

But bonds are less volatile than equities because they are higher in a company's capital structure, so debtholders are less likely to lose money if a company goes bust, said Brian Jacobsen, chief portfolio strategist of the investments group at Wells Fargo Funds Management.

"Even if we go off the fiscal cliff, I doubt that it will compromise the ability of many issuers to meet debt-service obligations," he said.

Still, conditions weakened enough for Bombardier Inc. (BDRBF) to pull a $1 billion debt offering Thursday, a day after Standard & Poor's Ratings Services cut the aircraft maker's credit rating by a notch, to BB.

A representative for the Montreal-based company confirmed the deal had been pulled because proposed terms were "not satisfactory." She declined further comment.

The postponement was probably a wise move, said Mary Talbutt-Glassberg, portfolio manager and trader at Davidson Trust Co. in Pennsylvania. "Folks don't like headlines with a downgrade when a deal is being issued," she said, noting the company's stock has fallen 16% over the past five days. "The stock has to settle down a little to help support the bond deal."

-Write to Patrick McGee at [email protected]

(Ben Dummett contributed to this article.)

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