Dollars and Jens
Wednesday, May 27, 2009
Atlas shrugs, at least a little bit
Corporate bond prices are pricing in the unfavorable treatment bondholders may get when the new administration favors unions over the rule of law:
To gauge whether those cases have made debtholders wary of other companies with so-called favored political classes, Garman compared spreads, or bonds' extra yields over U.S. Treasury yields, for companies with collective bargaining agreements with the high-yield bond market as a whole.
While the two performed in line with each other since 2003, they diverged sharply in February, with spreads on companies with organized labor gapping nearly 11 percentage points higher than the market as a whole, according to Garman's research.
The gap in spreads has persisted and was about 9 percentage points as of mid-May, Garman said. The gap appeared shortly after strategists reported signs that bondholder negotiations with GM were unraveling.
While strategists had originally expected GM's bondholders to recover as much as 50 cents on the dollar in a bankruptcy, recovery prospects began dimming as the United Auto Workers pressed for more favorable treatment.