The rising default wave
by Sam Jones
From a Fitch report out Wednesday (emphasis ours):
Fitch believes that the toxic combination of economic and funding pressures has set in motion the beginning of the next cyclical peak in high yield corporate defaults. In fact, a surge in corporate defaults has already taken place. The par value of U.S. high yield bond defaults alone has increased to $25 billion year to date through September from $3.5 billion for all of 2007, and including bonds affected by Lehman Brothers Holdings Inc.’s bankruptcy filing and Washington Mutual Inc.’s collapse, pushes the par value of corporate bond defaults above $100 billion, a level comparable to 2002 defaults…
…already.
Fitch believes that recent events are among a number of worrisome factors that suggest that the coming high yield default wave may be the most severe on record.
A few other select snaps from the report:
Impaired credit access will remain an issue for speculative grade companies years beyond the current crisis.
Consumer retrenchment more problematic than telecommunication meltdown.
Defaults tend to spike roughly one year following a meaningful contraction in corporate profit growth.
Roll on 2009, year of the corporate default.
From a strictly old-world point of view, this is going to be painful: corporate defaults always hurt.
What will make it all the more so this time, however (as compared to during the 1990s) will be the effect this has on the CDS markets. The pricing models on which CDS markets trade have not been tested through a major recession. Synthetic structured finance, to boot, offers the possibility of a damaging positive feedback loop, with ructions in the CDS markets forcing further deleveraging from banks, causing further credit contraction, and more corporate defaults.
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