Wednesday, January 13, 2016

Credit: Junk Still Junk, Even ex-Energy, ex-Mining

From Bloomberg Gadfly:

No Hiding From Debt Slump
Many investors blame the escalating weakness in corporate credit on falling commodity prices. But that’s only one piece of the story, one that ignores a collapsing credit cycle amid a much broader global slowdown.

Standard & Poor’s said on Tuesday that the outlook for corporate borrowers worldwide was the worst since the global financial crisis, with potential corporate downgrades outpacing possible upgrades by the most since 2009. This has been attributed largely to slower growth in China and a commodity rout that’s cut prices to the lowest since 1999.

In reality, the pain goes well beyond that. Industry sectors representing about 70 percent of the high-yield bond market have more than 10 percent of bonds trading at distressed levels, Deutsche Bank analysts Oleg Melentyev and Daniel Sorid said in a Jan. 8 report. That includes technology, media, consumer products and casino-operating companies, not just oil drillers and miners.

The ratio of deeply distressed bonds, or those yielding 20 percentage points more than benchmark rates, has continued to increase, reaching 8.8 percent for all high yield and 4.2 percent for the market excluding energy companies, the analysts wrote. This ratio is tightly correlated to default rates and points to an escalating number of insolvencies across a variety of industries....MORE