After hovering around 1-2% during the easy credit era, global default rates among corporations are projected to quadruple this year, and could get worse.
As a point of comparison, during the Great Depression, Moody’s Rated companies experienced its highest rates of debt default at 9.2% in 1932. The U.S. as a whole experienced a 21.2% corporate default rate during this time according to the U.S. Bureau of Economic Analysis.
But trouble may already be here. According to the RGE Monitor, the total value of corporate-bond defaults – defined as missed payments, bankruptcy, or restructuring – already exceeds the total for all of 2007. And it’s only February. As well, the amount of new grade “B” rated deals is approaching 90%, up from about 65% in 1997. This is important because …
The B ranking, four to six levels below investment grade, means holders of the debt only have a “small” assurance of being repaid over “any long period of time …”Making matters worse in our contracting debt markets is the amount of total debt being carried in this country ...
This tells us that Americans aren't in any position to take on any more debt, no matter what the Fed does with interest rates. What we should be wary of now is an unforeseen event, which increases the risk of financial matters getting worse (referred to as event risk), especially since the U.S. economy is already in a precarious position. Keep this in mind the next time someone tells you market fundamentals are strong.
- Mark
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