Investors Dodging Neediest Borrowers’ Bonds

Asset managers reduce holdings of lowest-rated junk bonds.

Investors from Vanguard Group Inc. to JPMorgan Chase & Co. are shunning bonds from the neediest borrowers as a slowing economy sends the default rate for companies that ratings firms deem to be in “poor standing” to the highest level since 2009.

Vanguard’s $18.4 billion fund that buys junk bonds is “incrementally taking down risk on a credit-by-credit basis,” said Dan Newhall, principal at the biggest U.S. mutual-fund firm. J.P. Morgan Asset Management has been reducing debt from companies more affected by lower consumer spending and has “dramatically” decreased holdings of securities ranked CCC since 2009, said Bill Morgan, a high-yield fund manager.

Sprint Nextel

Elsewhere in credit markets, bonds of Sprint Nextel Corp. rose after the third-largest U.S. wireless carrier confirmed that Japan’s Softbank Corp. is in talks for a “substantial investment” in the company. MGM Resorts International may seek to refinance about $3 billion of debt. The market for corporate borrowing through U.S. commercial paper contracted for a sixth week, reaching the lowest level in five months.

Reducing Leverage

MGM is planning its debt refinancing as the biggest casino operator on the Las Vegas Strip works to improve its balance sheet, according to Chief Financial Officer Dan D’Arrigo.

Bondholder Protections

A Moody’s measure of weakness in bondholder protections included in U.S. junk-rated debt increased to 3.94 in September, the worst since November. The gauge, known as a covenant-quality score, compares with 3.71 in August and a 2012 average of 3.72 through last week, according to Moody’s.

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