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Bonds dropped or shelved. Why do I care?
Various high profile companies from across the region are cancelling or freezing plans to issue bonds. But why do you care?
March 10, 2011 4:15 by Samuel Potter
Now, in a region fraught with political upheaval and social unrest, what do you think happens to those premiums? Simple, the company is less stable (it is, after all, operating in an unstable environment), so it has to pay bond holders a higher return on their investment. Plus, in a market desperately short of liquidity (currently the case in the Middle East), bonds have to pay an even higher premium if they want to attract what little cash is left in the system, compounding the problem.
All this makes issuing a bond just now a less appealing prospect than just weeks ago, as companies will be paying more for every dollar raised.
There will still be issues, of course – we’re still in an expanding region with credit hungry companies. And, ironically all this instability actually helps some bond issuers; stable governments with oil see their coupons fall, as higher oil prices mean they’re earning more money – hence are less of a risk.
But that aside, the bottom line is, we’d be seeing a lot more bond issuance if there weren’t protestors out on the streets across the region. In fact we predicted not long ago that this would be a heck of a year for bonds; but that was before the uprisings.
So, to the question our headline asked: Why do I care? Well, maybe you don’t. But you should: the bond market is a great barometer for the wider economy, since activity there is largely based on expectations of what the economy will do next. And we can tell by these stories and the altered corporate plans described in them, that folk in the bond market are just as uncertain as the rest of us – bonds are not cancelled, but they’re not going forward either.
So I guess we’ll all follow that ‘wait and see’ policy.
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