Capital Markets

Why Only High-rated Firms Turn to Bond Market

Spreads are still near historic highs, and make issuance all but impossible for companies below top-tier.
Stephen TaubDecember 24, 2008

Every few days, more companies seem to be tapping the bond market again. But the latest report from Standard & Poor’s gives a clear picture of why, for the most part, only firms that are A-rated or better are taking a shot.

It’s because most other companies still must pay a steep premium to get a deal done. And that’s true even though the Federal Reserve recently cut short-term rates to one-quarter of one percent, even though spreads have come down a bit in the past few weeks, they are still near historic highs.

For example, Standard & Poor’s says the spread on AA-rated bonds is currently 354 basis points and on A-rated paper, 472 basis points.

For a company with B credit, the spread is as much as 1,817 basis points over comparable Treasuries.

CCC-rated companies are “required” to pay a premium of 3,221 basis points to get a deal done.

In a nutshell, that tells the story of why one is hard-pressed to find any new issues among the companies with the worst credit these days.