While investors wonder if the stock market rally can struggle on through the forthcoming US reporting season, businesses in the real world continue to suffer. So far this year, there have been 68 defaults by global debt issuers, according to Standard and Poor’s.
That is triple the same period last year, led by the US, which accounted for two-thirds of all defaults. Moody’s, meanwhile, tallied up 35 defaults in March alone, the greatest number in a single month since the Great Depression.
But, while America looks to be copping the worst of it, the numbers actually point to a global crisis. A year ago, non-US defaults were only 5 per cent of the total.
What is more, when companies go pop these days, they do it with a bang. About 40 per cent of the defaults year to date were insolvency-related and half were distressed restructurings. Recovery rates are also dreadful. S&P thinks investors will be lucky to see a “modest” or “negligible” sum from half of defaulting issuers. In only 10 cases does the ratings agency expect more than 70 per cent returned.
Nor are things forecast to improve soon. S&P estimates that 13 per cent of all speculative grade bonds will default over the next 12 months.
Further out, Deutsche Bank reckons that, in the next five years, more than half of all companies that issued high-yield bonds will have to raise the white flag at some point. Moody’s predicts 30 per cent – similar to both the 1990s and early 2000 recessions. By comparison, the five-year rate during the Great Depression was 45 per cent.
All of this is food for thought for those piling into high-yield bond funds. Of course, pessimism is reflected in yields that are still 15 percentage points above 10-year US government bonds, according to Merrill Lynch’s high-yield index. But, if investors think defaults might rise to anything like 50 per cent, they had better start demanding far higher yields than that.
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