If History Is Any Guide, There’s A Lot More To Come. Another Wave Of Defaults In The U.S. Will Trigger A Tsunami In Emerging Markets. China And Russia Are Preparing For The Next Crisis By Buying Up Gold
Investmentwatchblog.com
April 8th, 2016
The rating company’s analysis of Brazil, India, Indonesia, Mexico, Russia, South Africa and Turkey shows that private-sector debt rose to an estimated 77 percent of GDP at the end of 2014, up from 46 percent in 2005.
Corporate defaults increased to a record in Brazil last year. China has also seen delinquencies climb exponentially, with at least 12 companies missing payments on bonds in the past two years.
If history is any guide, there’s a lot more to come. Another wave of defaults in the U.S. will trigger a tsunami in emerging markets.
The Coming Default Wave Is Shaping Up to Be Among Most Painful
When the next corporate default wave comes, it could hurt investors more than they expect.
Losses on bonds from defaulted companies are likely to be higher than in previous cycles, because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities.
“We’ve had more corporate debt than ever, and more leverage than ever, which increases the potential for greater pain,” said Edwin Tai, a senior portfolio manager for distressed investments at Newfleet Asset Management.
Loss rates have already been rising. The potential for them to climb further may mean that in general junk bonds are not compensating investors enough for the risk they are taking, said Michael Contopoulos, high yield credit strategist at Bank of America Merrill Lynch. The average yield on a U.S. junk bond is now around 8.45 percent, according to Bank of America Merrill Lynch indexes, about the mean of the last 10 years.
In bad times, corporate bond investors on average lose about 70 cents on the dollar when a borrower goes bust. In this cycle, that figure could be closer to the mid-80s, Bank of America strategists said. Those losses would be the worst in decades, according to UBS Group AG’s analysis of data from Moody’s Investors Service.
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