The State of the High Yield Market

by Hamish Norton

The high yield debt market has become an interesting place for shipping companies and investors. Issues from only three companies are trading with single-digit yields – International Shipholding, Sea Containers and Teekay. Every other issue trades to yield above 10%, approximately 500 basis points above the comparable U.S. Treasury bond or more. A spread of 500 basis points is not unusual for securities rated in the single-B category, but is not historically very attractive for a double-B rated bond issuer. However, none of the single-B bonds (so rated by both Moody’s and Standard & Poors) are trading to yield less than 15%, or 1000 basis points above the comparable Treasury security. Single-B shipping companies are not clamoring to issue debt at such yields, and interestingly, the market probably would not buy similar new issues at such yields in any case. For reference, the average yield of the entire group slightly exceeds 20% at current prices.

ISSUER’S POINT OF VIEW
What does this state of affairs mean for a shipping company? First, unless the company is International Shipholding, Sea Containers or Teekay, it probably should not try to access the high yield debt market right now (though I do not mean to imply any recommendation to these three). If the company is not in this group, it may be concerned about how to get investors interested again in high yield bonds of shipping companies. Investors will learn a lot from the troubles of the current crop of bonds, and will apply those lessons in the future; companies will have to make these investors happy.

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