More cheery news, this time about a supposedly looming wave of corporate defaults. Heavily indebted European and US companies are facing growing financial difficulties because they cannot refinance their borrowings due to the continuing closure of the credit markets, reports the FT on Monday.
Companies’ inability to borrow is raising the spectre of defaults, particularly among the most highly leveraged companies in sectors such as property that have been hardest hit by economic uncertainty.
A big source for refinancing in Europe was the high-yield bond market, which has been closed since July, the longest closure since 2003. The European leveraged loan market is also at a standstill, with only a handful of deals priced in the past month and $64bn in loans still awaiting syndication, according to Dealogic, the data provider.
The US high-yield and leveraged loan markets have also slowed to a trickle as fears of recession threaten to exacerbate problems for companies in need of capital. Loans awaiting syndication in the US stand at $74bn, according to Dealogic, while the US high-yield market in January saw the lowest amount of issuance since 1990.
“There does come a time when a company can no longer postpone the need for refunding”, noted Willem Sels, head of credit strategy at Dresdner Kleinwort.
Ken Emery, director of corporate research at Moody’s noted the ratings agency had started to see some defaults in the consumer and real estate sectors and “that will certainly pick up, although we are coming from a very low base as default rates are very low.”
Moody’s reckons the global speculative-grade or junk-grade default rate will jump 10-fold to 10 per cent by the end of the year in the event of a US recession – well above the historic average default rate of 5 per cent. The rise would come off a low of just under 1 per cent recorded in December.
Many analysts believe there is a strong likelihood of a US recession, despite the Federal Reserve’s aggressive interest rate cuts over the past two weeks.
Moody’s says companies may survive longer in a recession this time round because easy credit conditions in the first half of last year encouraged many to refinance before the market turmoil. The use of covenant-lite loans, which have relaxed default criteria, may also allow companies to remain in business longer.
Even if companies were able to attract investors, who have remained on the sidelines in the junk-grade arena, they would face annual borrowing charges around 3 percentage points higher as spreads between high-yield bonds and government bonds have widened sharply in both Europe and the US since July last year.
