RTC Sells S&L; Junk Bonds Slowly
The Resolution Trust Corp. has been quietly selling an estimated $50 million to $75 million worth of junk bonds weekly, chipping away slowly at its $2.9-billion portfolio from failed savings and loans.
For the most part, the weak junk market has been able to absorb the selling without plunging further than it has already on fears of a sluggish economy.
“There are still buyers in today’s market willing to invest in what they see has value,” said Joseph Bencivenga, head of high-yield--or junk bond--research at Salomon Brothers Inc.
A number of reasons are offered for the bond market’s resilience to the RTC sales, but many point to the thrift bailout agency’s decision to unload the securities slowly.
“The RTC has done a good job of metering the flow,” Bencivenga said. “In the beginning, people were afraid they would dump hundreds of millions (of dollars) a day.”
During a slightly busier than normal week, the RTC sold about $70 million worth of bonds Tuesday and offered $40 million more Wednesday, market observers said. By spreading out its sales, the agency has been able to prevent a great shock to a market that handles $100 million to $200 million worth of bonds daily.
When the government announced that it would sell assets from failed thrifts, including junk bonds, many feared that the bond sales would further depress the market.
Junk prices have slumped for most of the past year--since investors became skittish after the highly leveraged retail empire of Campeau Corp. began to come apart.
Junk bonds pay higher interest than investment-grade bonds to compensate for increased risk--principally, the risk that the company issuing the bonds won’t be able to make payments on them.
“I think the sales have hurt the market, but everyone has long since discounted the sales,” tempering the damage, said Paul Getman, an economist at Regional Financial Associates Inc. in West Chester, Pa. “When it first got wind that the RTC was going to be seizing thrifts with large junk portfolios, the market really fell apart.”
Despite a depressed market, the RTC cannot wait for better days. It is in business to get rid of bonds and other assets from failed thrifts--and it wants to do so before markets get worse.
The value of many of the RTC’s bonds is depressed, but if the economy continues to slow and consumers spend less, the companies that issued the bonds may have less money to pay interest and principal.
