From Wolf Richter at wolfstreet.com:
“Hangover from years of lenient credit may become painful.”
Credit rating agencies, such as Standard & Poor’s, are not known for early warnings. They’re mired in conflicts of interest and reluctant to cut ratings for fear of losing clients. When they finally do warn, it’s late and it’s feeble, and the problem is already here and it’s big.
So Standard & Poor’s, via a report by S&P Capital IQ, just warned about US corporate borrowers’ average credit rating, which at “BB,” and thus in junk territory, hit a record low, even “below the average we recorded in the aftermath of the 2008-2009 credit crisis.”
The one-year average default rate for US companies with a credit rating of B- is 9.8%, according to Standard & Poor’s. That’s a 1-in-10 chance that the company will default over the next 12 months. Companies getting downgraded deep into junk and issuing more low-grade bonds are precursors to soaring defaults.
The signs have been piling up. S&P Capital IQ:
In 2015, Standard & Poor’s downgraded 5.54% of the U.S. speculative-grade nonfinancial corporate borrowers it rates — the highest level since 2009.
The average credit rating for U.S. nonfinancial corporate issuers has fallen to a record low due to the continued rapid rise in lower-quality borrowers.
As a result, nonfinancial corporate borrowers’ net negative bias is at a post-recession high and the speculative-grade downgrade rate is at the highest level since 2009.
We believe a more conservative lending environment, where more limited capital market access enables lenders to better dictate terms and conditions, could spark liquidity challenges, accelerate downgrades, and ultimately lead to a spike in defaults.
And in a delicious bit of irony, in its more or less subtle manner, it blamed the Fed for the coming “spike in defaults”:
After the financial crisis, quantitative easing-induced low interest rates enabled companies across the credit spectrum to borrow at attractive pricing and terms in the capital markets. And, until recently, investors were willing to accept the heightened risks associated with speculative-grade (rated ‘BB+’ and lower) debt in return for higher yields.
However, the residual hangover from years of lenient credit may become painful for lower-quality issuers, especially when lenders become more selective and discerning. As borrowing costs rise with market volatility and uncertainty, lower-quality borrowers, who opportunistically were able to tap the capital markets, will most likely feel a credit pinch in a more subdued and conservative borrowing environment.
The Fed’s policies since the Financial Crisis have systematically destroyed the possibility to earn a visible real yield on low-risk corporate bonds or US Treasuries. So investors have embarked on a frantic search for yield, wherever they could find it, and they found it in junk bonds, and in chasing after junk bonds, they pushed those yields down too, and companies took advantage of it.
To continue reading: S&P Gets Bearish, Sees “Spike in Defaults,” Blames Fed
