High Yield Bonds: Providing Liquidity Where Banks Won’t

If yield was the thread that wove together ship finance transactions in 2004, then it’s not surprising that the mother of all yield driven markets, the high yield bond market, was highly receptive to shipping this year. Investors generally felt that the high yield market would offer returns superior to equities. With the Dow Jones Industrial Index climbing just 8% in 2004, they were spot on.

The demand for yield was universal around the planet, with shipping companies of all shapes and sizes tapping bond markets around the world in a wide variety of currencies. This year also saw the introduction of new buyers for lower rate paper, such as hedge funds, who are able to use leverage to turn a 10% B- or CCC rated deal into a 20% return.

For the stronger borrowers, terms were extraordinary, highlighted by Hornbeck picking up nearly 500 basis points on its bond refinancing, OSG securing a 20-year amortization, and virtually every bond in the shipping sector trading sharply over par to push some yields into the 5% range. The favorable market fundamentals also gave financially weaker companies access to a market that has for many years been closed to them, at any price.

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