LEX Rallying stock markets and falling credit spreads have rewarded faith in corporate profits and solvency. But fears must surely lurk at the back of money managers’ minds – the weight of US household debt, the Federal Reserve’s lack of room to push interest rates lower, and the eventual bill for government spending.
Such concerns may be brushed aside as the economy recovers. Consider corporate default rates. Since April 2007, the US has seen 10 of the 20 largest defaults in three decades. Distressed debt exchanges have reappeared, accounting for a third of defaults this year, compared with the historic average of 13 per cent. Yet Moody’s notes that the pace of defaults has slowed, with only eight corporate debt issuers that it rates failing in October, the lowest monthly total this year.
The ratings agency now forecasts that default rates for US junk or speculative grade debt will peak near 14 per cent in November, before falling back swiftly to 4 per cent in a year’s time – a far milder turnout than the one-in-five scenario priced in at the height of the panic.
The risk remains that a shock, such as a sharp dip in equity markets or a large default, could alter the shape of next year’s recovery, causing default rates to decline more slowly than anticipated.
Yet arguments about what next year looks like may be missing the point. Of the high-yield debt issued in the boom years of 2006 and 2007, less than $100bn must be refinanced this year and next. But that annual total jumps to about $250bn in 2011, calculates CreditSights, and keeps rising towards $500bn by 2014. The recovery must not only be strong enough, but also long enough, to push those nagging fears away.
