Hot Air Hisses Out of Junk Bond Bubble, Destroys Stocks one Company at a Time

wolfstreet.com / by Wolf Richter / September 30, 2014

General Cable (BGC), a Fortune 500 Company with $6.2 billion in revenues, made an announcement on Monday that caused its already beaten-down stock to drop another 6.5%: it withdrew its offering of $250 million in senior unsecured junk-rated notes.

Due to “uncertain and weak overall conditions in the high yield debt market,” the statement said. Issuing the debt now “would not be in the best interest of shareholders under terms currently available,” CEO Gregory B. Kenny explained.

Junk-bond default rates have been very low; as long as old debt can be replaced easily and more cheaply with new debt, and as long as new losses and negative cash flows can be funded with new debt, default isn’t necessary. Investors cling to this notion by their fingernails to rationalize the record low yields they’re accepting.

It’s a self-propagating cycle: new money chases yield and finds it in junk, and it allows companies to avoid the hard truth as everything gets funded, and default rates drop, which brings in even cheaper money to replace old wobbly debt and fill operating sinkholes, and risks disappear from the equation since new money can always keep a company afloat.

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