Wednesday, June 9, 2010

Global rates of corporate default fall [well...sort of]

A recent article by the Financial Times makes reference to fall of corporate defaults between the month of April and May 2010. However, the authors mention that this may be an aberration, namely that:
measures of corporate distress, which track borrowing costs for junk-rated companies, rose last month amid growing concerns over sovereign debt. While levels are much reduced from a year ago, Moody’s speculative-grade corporate distress index rose to 14.9 per cent at the end of May, up from 14.1 per cent in April in the first rise since February.

Rating agency Standard & Poor’s is finding a similar trend. Its distress ratio, which tracks the number of high-yield securities trading at spreads greater than 1,000 basis points relative to US Treasuries, rose 40 per cent from March to May 14.

A rising distress ratio typically proves to be a precursor to more defaults if accompanied by a market disruption, S&P said.

The article further quotes S&P:
In the slim chance that the economy experiences a double-dip recession, many of the surviving leveraged issuers originated during 2003-2007 could face renewed default risk unless they significantly reduce their debt burdens.

It is not a matter of if, but rather when. We have entered into what i believe is the second leg of the crisis that began in the spring of 2007. Unless drastic changes in the meddling fiscal and monetary policy occur, the Dow Jones and S&P 500 will fall significantly below the March 2009 lows.

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