Displaying items by tag: credit

(New York)

Investors beware, the fundamentals of the junk bond market are looking terrible. The deterioration of the market has been happening for a long time, and thus it makes it easier not to realize it. The junk bond market is now about twice the size it was in 2007, and credit quality is lower. Protections for investors, in the form of covenants, are also much weaker as issuers were able to use the ultra-low rate market to their advantage. Now the big worry is that Libor is rising and many companies have floating rate debt that they cannot cover once it reaches certain levels.

FINSUM: According to the WSJ, the market should expect $500 bn of junk bond defaults over the next three years, and this figure could amplify considerably.

(New York)

Investors hang onto your hats, a big fixed income rout might be coming. While it was easy to write Italy’s big bond losses off to its recent political crisis, the Wall Street Journal is arguing that all risky bonds may be in for a reckoning. There are a couple reasons. One is that just as in Italy’s two-year bond, many fixed income securities may hit a “double bottom”, which could lead to serious losses. But more fundamentally, many investors are now starting to view bonds higher up the quality spectrum more favorably, which means the market may suffer a significant “risk-off” period. Global high-yield bonds are down almost 4% already this year.

FINSUM: Our bigger worry than the points mentioned here is that as safer bonds start to get better yields from rising rates, there is less and less incentive to buy junk. That is a major change from the paradigm of the last few years.

(New York)

Credit rating agency Moody’s has just put out a broad and scary warning to investors: when the economy turns around, we have may have a junk bond crisis on our hands. Moody’s says that there will be widespread junk bond defaults in the next recession stemming from huge issuance and heavy indebtedness. With rates so low following the Crisis, indebted companies issued hugely risky and burdensome debt that was eagerly gobbled up by investors. According to Moody’s “The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives”.

FINSUM: All that issuance was always going to come back to bite. Credit-worthiness was low and investors gave up a lot of safeguards. It seems inevitable the bill will come due.

(New York)

Investors beware, credit quality is quickly eroding in the real estate sector. While lending standards started strong after the Crisis, they have eroded significantly in the last few years as investor demand for yields has pushed lenders further down the credit spectrum and eroded protections. The credit quality of both prime and sub-prime borrowers has fallen and the popularity of CRT (credit risk transfer) securities, or mortgage bonds not fully backed by Fannie and Freddie, has risen. Worryingly, yields have not reacted to the decline in quality, as such risky CRT bonds have recently traded at less than a 100 bp premium to Treasuries.

FINSUM: So the big worry with mortgage bonds is that they always collapse faster than any model can predict. Because mortgage payments are so linked to the underlying economy and employment, when a recession happens, the defaults just flood in. We could be headed in that direction.

(New York)

Over the last several years consumer credit markets have experienced a huge boom. As the economy started to pick up pace, consumers abandoned the deleveraging that characterized the Great Recession and started to use more credit. This led to a boom in profitability for credit card companies. However, that era has now come to an end. “The easy money has been made in card lending”, says a consumer finance analyst at Wells Fargo. Battles over ever lower rates for consumers as well as the cost of competing by offering rewards has challenged the landscape.

FINSUM: We definitely think the credit card boom as over as consumers have wisened up and have many more good options.