From the Financial Times today Corporate Bond Defaults Hit Record.
The number of companies defaulting on their debts has risen to record levels this year, according to Standard & Poor’s, while investment returns for risky corporate debt have skyrocketed since January.
S&P said 201 borrowers with $453.1bn in debt have defaulted this year, exceeding the 126 defaults for all of 2008, which comprised debt worth $433bn. It also surpassed the number of defaults from the comparable period in 2001, the previous worst year on record.
Wow, that sounds pretty bad. Moreover, we still have three months left to go in 2009.
“Recessionary economic conditions and ongoing uncertainty in the financial markets are pushing the number of corporate casualties higher,” said S&P
Makes a lot of sense. Surprising (the making sense part) coming from S&P but still..
The defaults have not stopped speculative debt from being this year’s best performing sector for investors as they look instead to a virtuous cycle that enables more financially strapped companies to refinance as the market rallies, a scenario that portends lower future defaults.
“The number of defaults is impressive but, on an absolute month-to-month basis, it has been coming down steadily,” said Martin Fridson, chief executive of Fridson Investment Advisors. “It makes sense that the market has been rallying since then.” He added: “The virtuous cycle is a function of the high-yield new issue market reopening in response to the increased confidence in credit that provides the bridge for companies to get over any near-term maturities that could threaten their solvency.”
Yes, I have been watching this in a combination of awe and stupor. The "virtuous cycle". That cuts both ways Mr. Fridson. Remember that the virtuous cycle of unlimited liquidity and risk license made it possible for every bad asset underwritten in the Western World to find a buyer.....until one day the music stopped and well, you know the rest. Also, it is apparent that a lot of smart money is beginning to bet against this virtuous cycle through buying investment grade (IG) and selling High Yield (HY). Hence, if you are thinking, or a fund you invest in is thinking of getting into HY now, you're probably buying it from a smart guy getting out or establishing a fresh short. That's usually a "bad technical". Back to the article!
US high-yield debt has generated a return of nearly 40 per cent so far this year, outstripping the 10 per cent rise in equities, while pan-European high yield is up 63 per cent, according to data from Barclays Capital.
Investors began buying debt at highly distressed levels earlier this year, confident that the extreme projections for defaults would not materialise.
Hmmm. How are actual defaults coming in?
S&P’s 12-month trailing global corporate speculative grade bond default rate increased to 8.58 per cent in July, up from 8.25 per cent in June 2009.
On a 12-month trailing basis, S&P forecasts that the US corporate speculative grade default rate will rise to 14.3 per cent by March 2010. The current record rate is 12.54 per cent, set in July 1991.
Under S&P’s two alternative economic scenarios, the pessimistic scenario yields a catastrophic mean corporate default rate of 18 per cent, which would entail 255 defaults.
The optimistic scenario yields an average corporate default rate of 11.4 per cent, or 161 issuers defaulting.
Umm, I'm going to go out on a limb here and say the High Yield sector is a tad "overbought".
Hey you! Watch this!! (Remember Madness??)