Soaring bankruptcies would seem to fit well into the scenario of debt contraction and deflation of which SLL has been warning for the last 18 months. Don’t worry, world equity markets will get the joke. Some of them already have; check European stock averages this year. From Wolf Richter at wolfstreet.com:
Leaving ugly skid marks on the economy, banks, and investors.
The “end of the credit cycle” is a harmless-sounding moniker for an era when defaults and bankruptcies suddenly re-materialize, as if out of nowhere, and when investors get to eat big losses in what they thought were conservative investments.
It’s when new money for Corporate America gets a little more skittish, and credit just a little tighter – not all at once, but over time. And for over-indebted junk-rated companies, that slight tightening and the accompanying rise in rates at the top triggers liquidity crises, defaults, and bankruptcies at the bottom.
Ratings agencies have responded to the end of the credit cycle by downgrading companies in a relentless tango. With each downgrade, credit tightens just a bit more for these companies, causing additional risks and operational difficulties. As liquidity dries up for them, they slash investments and cut costs, which wipes out the hope for growth – the essential ingredient that kept the illusion alive.
In that vein, Standard & Poor’s reported that it downgraded 44 US junk-rated companies in March, while upgrading just 15. This comes on top of the 82 issuers it downgraded in February. In the first quarter, about 45% of S&P’s downgrades hit oil & gas companies. Not a surprise, given the state the industry is in. But 55% of the downgrades hit companies outside oil & gas!
Note that top among the reasons S&P cited for the March downgrades is “operating performance.” That includes the disappearing hope for growth:
• Operating performance, deteriorating or expected to deteriorate (17);
• Potential lack of liquidity or rising potential for default (15);
• Merger, acquisition, or asset sales (2).
So S&P sees a “Spike in Defaults” as the “hangover from years of lenient credit may become painful.”
But this gloomy outlook concerns only part of the business world: larger companies with debt securities that are rated by the ratings agencies.
That part of the world, after years of profligate borrowing from over-eager investors that the Fed had blinded with its monetary policies, is in trouble, though now Wall Street soothsayers are once again running around and beating the bushes, proclaiming that junk bonds are a great deal. And they have to, because without new money, the entire house of cards comes tumbling down.
To continue reading: US Commercial Bankruptcies Suddenly Soar
