Zombie apocalypse isn't what you were expecting

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Nomi Prins said:
In its recent quarterly report, the BIS warned that low rates have catalyzed an increase in the number of “zombie” firms. The number of such firms has now risen to an all-time high.

Zombie firms are companies “that are at least 10 years old, yet are unable to cover their debt service costs from profits.” Their prospects for future growth aren’t so hot either.

According to the BIS, these zombies are still piling on debt and sucking money out of the real economy. Zombies “took on more debt and disposed of fewer assets after 2000.” This behavior accelerated after the financial crisis because of low interest rates.

The problem is that once a company becomes a “zombie” it tends to stay a zombie. That phenomenon is only getting worse. The BIS disclosed that “whereas in the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016.”

Zombies created from an influx of central bank money aren’t good long-term investments. It’s one thing for a company to take on debt to grow, but it is another to take on debt simply to re-pay other debt.

When the debt bomb finally detonates, it’s the rest of us who will suffer. Because of the collusion that’s gone on and continues to go on among the world’s main central banks, that problem is now an international one.

This can be 'fixed'

Larger companies unable to pay or roll over their debt will get their needs met by that countries 'bad bank'

Smaller companies ....... well we need to show em how to run a business

Reckon on Fannie Mae, Freddie Mac, and a whole raft of US oil companies already in this situation or heading that way.

Possibly a different approach to companies with foreign debt ?
Be interesting to see what China gov does when lots of US$ based Chinese debt is in default.

You gonna reposess my factory ?
Well I guess I never considered the "zombie" apocalypse as being actual zombies in the tv/movie sense of zombies, but when some big SHTF event happens leaving masses of unprepared people & even some prepared people who lost most everything walking around trying to find food, shelter, etc. Also huge masses of trouble makers like the antifa thugs burning cities around the whole country maybe more. This sounds basically like forecasting a potential depressions which considering the self-sufficiency (or lack thereof) level of most Americans today (especially the younger ones) it could look like the walking dead if things crashed big & hard.
This can be 'fixed'

I'm not so sure. It seems like we've crossed the Rubicon with respect to letting bad bets (Zombie firms) fail. Banks are too fragile and systemic risk is too high to let the markets work like they should (to absorb the losses of debts that can't be repaid). So we're on this path of slowly bleeding out until we fall unconscious.
After 35 years in the making, the bond bubble would be the biggest ever. Companies, governments and even mortgages via securitisation are all financing themselves via bonds.

The trouble is, interest rates can’t really go much lower. They can go higher though. And that spells trouble in bond markets and elsewhere.

The Australian Financial Review (AFR) reported on what the consequences look like in Australia in terms you can understand:
PIMCO warns that rising mortgage costs will increase mortgage payments from 38 per cent of pre-tax income to close to 48 per cent, near its worst level over the past two decades.

Interest rate shocks are a shocker, as Aussies might say.

Further AFR articles have the headlines “Developers squeal over apartment price slump” and “6700 apartment projects blacklisted for loans”.

But it’s not just Australian debt markets that are tightening. Bloomberg reports “European Bond Market Falls Victim to Volatility as Third Sale in a Week Pulled”. An Austrian, a German and a Bahraini firm all pulled their bond sales.

Bond yields around the world spiked recently thanks to Italy, the Federal Reserve chairman saying he wants to hike rates much further, and the Bank of Japan winding down its stimulus.

If bonds are in a bubble, it may have just popped.


Canada’s economy is in the throes of a zombie outbreak and it’s threatening to devour the country’s productivity.

That, more or less, is the conclusion of a new report from Deloitte, which found that at least 16 per cent of publicly traded firms here could be classified as “zombies” — defined as mature firms more than 10 years old that lack sufficient revenue to cover interest payments on their debt.


Following Turkey’s failed coup attempt in July 2016, President Recep Tayyip Erdogan imposed a state of emergency, curtailing not only political but also economic freedoms, including a ban on corporate bankruptcies. When the Turkish government lifted the state of emergency two years later, it naturally led to fears of a bankruptcy surge. The Turkish lira’s meltdown in August, contributing to a 40 percent devaluation of the currency this year alone, has exacerbated such fears. Erdogan’s response has been to allow companies to exclude foreign currency losses from bankruptcy calculations, which risks creating a “zombie economy” to complement Turkey’s already lifeless democracy.


The Fed wants to continue raising rates. We live in interesting times.
The fact that they have a holy war going on at their southern border & mass migration through their country as all those military age males women & children seek to convert Europe into moslem theocracies make a new life for themselves as they obligingly blow up the infidels & rape the women assimilate to their new nations culture isn't really helping matters. Even though we all know it's just a mass wave of islamic peaceniks, some trouble makers from somewhere (probably the west) have gotten in & are creating additional problems for the govt. :flail:
The zombie Apocalypse will be when the rest of the world stops buying our debt and we try and monetize our way out of trouble, ALA Venezuela. That's when it happens. Triple digit inflation and rampant poverty. Those without "hard currency" such as long term storage foods, gold and silver, guns and ammo, fuel, etc. will become "zombies", wandering around in a sort of dazed shamble, waiting for the government help that never comes. It won't be until the whole thing crashes down around the world, and something new rises form the ashes that things begin to get better.

Fiat currency has to die and be replaced by hard currency of barter before we can return to true stability. When the US stops being able to "consume" the worlds production like a starving raccoon, it all comes to a screaming halt. All those Bangladeshi textile workers return to their huts to starve, just as half of Indonesia and China do. It all collapses in a fucking heap. There you have it; Zombie Apocalypse.
The zombie Apocalypse will be when the rest of the world stops buying our debt ...

It seems inconceivable that this could come to pass, but damn if the neoconservatives aren't taking it as a personal challenge. I'm reminded of that scene in Robin Williams' horrible Popeye movie where the tax man is taxing everything imaginable before Popeye finally gets fed up and rebels. Sanctions, sanctions, swift. Sanctions, sanctions, swift.

I don't think I posted about it yet, but the business with this Khashoggi guy that the Saudi's purportedly assassinated in their embassy in Turkey on the order of the crown prince could end up being a significant inflection point in the US-Saudi relationship and consequently, the petrodollar.

Edit: The rest of the Khashoggi discussion was moved to a new thread: https://www.pmbug.com/forum/f9/khashoggi-death-usa-principles-vs-saudi-oil-petrodollar-3857/
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From the glass half empty department...:
BBB-rated bonds are just one notch above junk (also called high-yield).

Fallen angels are bonds that slip from BBB to junk.

... during recessions. All the investment grade bond funds have to dump the fallen angels straight into illiquid markets with few takers.

Half of the corporate bond universe is BBB-rated.
When the junk bond market does blow, it is nearly guaranteed to take equities with it. That's the scary thing about the recent equity selloff.

The junk bond market selloff has barely started and so has the accompanying stock market decline.

After quitting his job at a $7 billion hedge fund to go it alone three years ago, Adam Schwartz happened upon a short so certain he built a notional position amounting to half his fledgling firm’s assets on it.

He’s been borrowing shares and stockpiling bearish options on exchange-traded funds that track major credit indexes, confident that a blow-up in fixed income will hit these passive vehicles the hardest.

Schwartz reckons it’s only a matter of time before rising rates choke off financing for highly leveraged companies, spurring a wave of bond defaults.

But running a hedge fund with mostly his own cash has given the 39-year-old freedom to bet on more extreme scenarios, like the one where credit ETFs -- which have vaulted to prominence promising liquidity comparable to stocks -- perish in the bloodbath.

More: https://www.bloomberg.com/news/arti...r-stakes-own-cash-betting-credit-etfs-crumble
China wants to deal with it's zombies. The western world is still sleeping on this issue.
China will encourage "zombie" firms that still retain "business value" to restructure and woo strategic investors to cut debt to reasonable levels, the state planner said on Tuesday.

As part of its efforts to curb soaring corporate debt and tackle price-sapping capacity gluts in sectors such as steel and coal, China has promised to improve bankruptcy procedures and allow vast numbers of loss-making "zombie" companies to close.

But Beijing has also sought to ensure a smooth exit for hundreds of insolvent enterprises in a bid to avoid unemployment and political instability in struggling industrial regions.

"It is necessary to carry out these tasks in an orderly manner, effectively prevent moral hazards such as debt defaults and the loss of state assets, and ensure social stability," the National Development and Reform Commission (NDRC) said in new guidelines published on its website.

The NDRC ordered local governments to prepare lists of "zombie" firms within three months. The firms will be encouraged to secure agreements with their creditors and draw up restructuring plans within six months.

Firms that meet the conditions for immediate bankruptcy and liquidation will be eliminated, it said.

This is from May, 2018 - roughly five months before the BIS report mentioned in the OP of this thread:
With corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.

The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.

The "prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," Mariarosa Verde, Moody's senior credit officer, said in a report. "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."

Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.

Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."
Lower-rated companies have managed to keep their defaults below the historical average even though their credit metrics are "deeply stretched," Verde added.

"This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default," she wrote. "These companies are poised to default when credit conditions eventually become more difficult."


Rickards says:
The danger is that when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.
If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be at least six times larger than the subprime losses in 2007-08.


The last “Minsky Moment” came from subprime mortgages.

Those are getting problematic again, but I think today’s bigger risk is corporate debt, especially high-yield bonds.

Corporate debt is now at a level that has not ended well in past cycles. Here’s a chart from Dave Rosenberg of Gluskin Sheff:


The debt/GDP ratio could go higher still, but I think not much more. Whenever it falls, lenders (including bond fund and ETF investors) will want to sell.

Then comes the hard part: to whom?

Unprecedented Liquidity Crisis

You see, it’s not just borrowers who’ve gotten used to easy credit. Many lenders assume they can exit at a moment’s notice.

We have two related problems here:
  • Corporate debt issuance, especially high-yield debt, has exploded since 2009.
  • Tighter regulations discouraged banks from making markets in corporate and high-yield debt.

Both are problems, but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major banks’ market-making abilities by around 90 percent.

For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap.

The problem is they are not true market makers. Nothing requires them to hold inventory or to buy when you want to sell.

That means all the bids can “magically” disappear just when you need them most.

In a bear market, you sell what you can, not what you want to. The picture will not be pretty.

To make matters worse, many of these lenders are far more leveraged this time. They bought their corporate bonds with borrowed money. They were confident that low interest rates and defaults would keep risks manageable.

In fact, according to S&P Global Market Watch, 77% of corporate bonds that are leveraged are what’s known as “covenant-lite.”

Put simply, the borrower doesn’t have to repay by conventional means. Sometimes they can even force the lender to take on more debt.

As the economy enters recession, many companies will lose their ability to service debt. Normally, this would be the borrowers’ problem, but covenant-lite lenders took it on themselves.

Another problem is that much of the at least $2-T in bond ETF and mutual funds isn’t owned by long-term investors who hold to maturity.

When the herd of investors calls up to redeem, there will be no bids for the “bad” bonds. But funds are required to pay redemptions, so they’ll have to sell their “good” bonds.

Remaining investors will be stuck with an increasingly poor-quality portfolio, which will drop even faster.

Those of us with a little gray hair have seen this before, but I think the coming crisis is biblical in proportion.

... Gundlach, whose DoubleLine has $130 billion in assets under management.

Gundlach — sometimes known as the "bond king" — also flagged trouble in the corporate bond market, which got "dragged down" in the "economic mess that we're in."

"The corporate bond market is so much worse today than it was in 2006," he said.

Among Gundlach's concerns: a corporate bond market that has tripled in size, and a BBB-rated bond market that is now bigger than the junk-bond market. Using leverage ratios alone, "45%, not just of the BBB but the entire corporate bond market would be junk right now," he said, citing figures from Morgan Stanley.

A recession or downturn could "spark" a wave of downgrades from investment grade bonds into junk bonds, he said.

More: https://www.cnbc.com/2019/05/07/bon...-national-debt-is-totally-out-of-control.html
* Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody’s Investors Service and S&P Global Ratings.

* This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market, Bloomberg Barclays index data show.

More: https://moneymaven.io/mishtalk/econ...res-deflation-up-next-YVeMRrVqLEaueKaY2sMLBQ/

^^^ Definitely a glass half empty commentary. I'll be in my bunker...
... Fitch Ratings expects the number of institutional term loan defaults in April to top the record of 15 set in 2009, according to a new Fitch Ratings report.

"Fitch anticipates the default rate will exceed 3% in May, which would be the highest since March 2015," said Eric Rosenthal, Senior Director of Leveraged Finance. "The $7 billion of April default volume propelled the TTM default rate to 2.6% from 2.2% at March end."

The 14 defaults registered this month impacted 10 separate sectors, led by three in healthcare/pharmaceutical. At least another $3 billion is projected to occur this month, with Neiman Marcus Group Inc. and Akorn Inc. expected to default imminently.

Several large companies on our Top Loans of Concern missed corresponding bond interest payments earlier this month and are likely to file bankruptcy including Intelsat Investments, JC Penney, and Ultra Resources.

Neiman's and JC Penney's defaults would together lift the retail rate to 13% from the current 7% level. The default rate for retail is forecasted at 19% at year end, led by anticipated defaults for Serta Simmons Bedding, J Crew, Ascena Retail Group, and Jo-Ann Stores.

The energy TTM rate stands at 5.5%, but sizable expected defaults from Seadrill Partners, California Resources and Chesapeake Energy would push the rate to 18.0% by year end.

The telecommunications default rate reached 4.0% following Frontier Communications' bankruptcy and would rise above 7.5% if Intelsat files.

Fitch's Top and Tier 2 Loans of Concern's combined lists total $258.5 billion, exceeding 18% of the loan index. This is up from $233.6 billion last month and well above the $102.1 billion of February's pre-pandemic total. The Top Loans of Concern total jumped to $69.4 billion from $54.8 billion in March. Retail, energy, healthcare/pharmaceutical and telecommunications together account for 60% of the Top Loans of Concern's outstandings.

Last month, we raised our 2020 default forecast to 5%-6% from 3%, equating to roughly $80 billion of volume which would top the record $78 billion from 2009. In addition, Fitch projects an 8%-9% default rate for 2021. If the expected recession becomes prolonged, a double-digit default rate is conceivable for 2021.


In Hollywood, virus outbreaks usually cause a zombie apocalypse. In real life, the C19 virus outbreak is killing zombie(s) (companies).
The financial crisis of 2008 was about home mortgages. Hundreds of billions of dollars in loans to home buyers were repackaged into securities called collateralized debt obligations, known as CDOs. ...

... To prevent the next crisis, Congress in 2010 passed the Dodd-Frank Act. Under the new rules, banks were supposed to borrow less, make fewer long-shot bets, and be more transparent about their holdings. The Federal Reserve began conducting “stress tests” to keep the banks in line. Congress also tried to reform the credit-rating agencies, which were widely blamed for enabling the meltdown by giving high marks to dubious CDOs, many of which were larded with subprime loans given to unqualified borrowers. Over the course of the crisis, more than 13,000 CDO investments that were rated AAA—the highest possible rating—defaulted.

The reforms were well intentioned, but, as we’ll see, they haven’t kept the banks from falling back into old, bad habits. After the housing crisis, subprime CDOs naturally fell out of favor. Demand shifted to a similar—and similarly risky—instrument, one that even has a similar name: the CLO, or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan. There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.
... according to many estimates, the CLO market is bigger than the subprime-mortgage CDO market was in its heyday. ...
Loan defaults are already happening. There were more in April than ever before. It will only get worse from here.

Even before the pandemic struck, the credit-rating agencies may have been underestimating how vulnerable unrelated industries could be to the same economic forces. A 2017 article by John Griffin, of the University of Texas, and Jordan Nickerson, of Boston College, demonstrated that the default-correlation assumptions used to create a group of 136 CLOs should have been three to four times higher than they were, and the miscalculations resulted in much higher ratings than were warranted. “I’ve been concerned about AAA CLOs failing in the next crisis for several years,” Griffin told me in May. “This crisis is more horrifying than I anticipated.”

More: https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/

The Fed is trapped by their ZIRP policy. They can't let the zombie companies fail en masse or the banks and whole financial system might collapse.
Well, looks like bankruptcies are starting to gain steam at the same time that corporate debt markets are exploding (expanding). :(

Retailers, airlines, restaurants. But also sports leagues, a cannabis company and an archdiocese plagued by sex-abuse allegations. These are some of the more than 110 companies that declared bankruptcy in the U.S. this year and blamed Covid-19 in part for their demise.

Many were in deep financial trouble even before governors ordered non-essential businesses shut to help contain the spread of the virus. Most will reorganize and emerge from court smaller and less-indebted. The hardest hit, however, are selling off assets and closing for good.

They include plenty of big, iconic names. Hertz and J.C. Penney and now Brooks Brothers, too. The vast bulk, though, are small and medium-sized businesses scattered across the country. Their downfall might not normally garner much attention, but it does underscore the full extent of the damage Covid-19 has inflicted on the economy.

The list compiled for this story is based on court records, statements or interviews in which company executives explicitly linked the virus to their filing. It is only a snapshot of the thousands of corporate entities that have landed in bankruptcy court since the pandemic took hold in March.

Saw a post in another thread that reminded me of this topic, so I went searching for current news/data. Here's what I found:

July 2021:
Altogether, the evidence in this and the previous sections suggests that U.S. banks not only have limited credit exposure to zombie firms, but they also lend to zombie firms at terms suggesting an elevated assessment of credit risk.

Main Takeaways

In this note, we provide a panoramic view of the prevalence of zombie firms in the U.S. economy. Our main assessment is that zombie firms—defined as nonviable firms with low growth prospects that survive on cheap credit—are not an important feature of the U.S. economy, so far, and did not benefit disproportionally from the improvement in credit market conditions resulting from the unprecedented fiscal and monetary support following the outbreak of the COVID-19 pandemic.

Despite this assessment, it is too early to dismiss concerns that the current economic conditions may be breeding new zombie firms. The COVID-19 pandemic is an economic shock of unprecedented magnitude, and while its potential scarring effects on the economy are difficult to predict, it may severely damage some sectors of the economy, turning many firms into zombies. Whether this risk materializes can only be assessed as new data become available and will depend on the strength of the economic recovery post pandemic.

May 2022:
They are creations of easy credit, beneficiaries of central bank largesse. And now that the era of unconventional monetary policy is over, they’re facing a challenge like never before.

They are America’s corporate zombies, companies that aren’t earning enough to cover their interest expenses, let alone turn a profit. From meme-stock favorite AMC Entertainment Holdings Inc. to household names such as American Airlines Group Inc. and Carnival Corp., their ranks have swelled in recent years, comprising roughly a fifth of the country’s 3,000 largest publicly-traded companies and accounting for about $900 billion of debt.
Of course, there have been any number of moments over the past decade when zombie firms have appeared on the cusp of a reckoning, only for markets to be tossed a last-minute lifeline. But industry watchers note that what makes this time different is the presence of rampant inflation, which will limit the ability of policy makers to ride to the rescue at the 11th hour.

That’s not to say that a wave of defaults is imminent. The Fed’s unprecedented efforts to bolster liquidity following the onset of the pandemic allowed zombie companies to raise hundreds of billions of dollars of debt financing that could last months, even years.

Yet as the central bank works to quickly unwind the stimulus, the effects on credit markets are already plain to see.

Junk-rated companies, those ranked below BBB- by S&P Global Ratings and Baa3 by Moody’s Investors Service, have borrowed just $56 billion in the bond market this year, a more than 75% decline from a year ago.
What’s worse, companies that piled loans onto their balance sheets to ride out the pandemic now face the daunting prospect of higher interest rates eating a larger and larger share of their earnings.
While the exact criteria market experts use can vary, many economists consider zombies to have interest-coverage ratios below one over a given period. To account for the impact of the pandemic, Bloomberg’s analysis looked at the trailing 12-month operating income of firms in the Russell 3000 index relative to their interest expenses over the same span.

Roughly 620 companies didn’t earn enough to meet their interest payments over the past year, down from 695 12 months prior, but still well above pre-pandemic levels.
Any significant uptick in bankruptcies will make it more difficult for the Fed to engineer a so-called soft landing that allows the US to avoid a recession, according to Vincent Reinhart, chief economist at Dreyfus and Mellon.

“You worry that the mechanism of financial fragility generally, zombie firms in particular, are an accelerant to what the Fed does,” Reinhart said. “As rates rise it pushes more of those firms into distress, and amplifies the tightening by the Fed of financial conditions and credit availability.”

Equity investors may already be awakening to such risks. Zombie firms in the Russell 3000 have plunged 36% over the past year on average, versus just 4.3% for the broader gauge, data compiled by Bloomberg show.

Still, even as some zombies end up in bankruptcy, effectively killing them, new ones will emerge, as inflation pushes more companies into distress. The number of living-dead companies can stay close to current levels or even rise for some time, according to Noel Hebert, direct of credit research at Bloomberg Intelligence.

“The combination of interest-rate hikes and inflation will produce more zombies,” Hebert said. “By year-end, we’ll have more.”

October 2022:
Goldman Sachs recently estimated that some 13% of U.S.-listed companies “could be considered” zombies, which it called “firms that haven’t produced enough profit to service their debts.”

But in a study last year, the Federal Reserve found that only roughly 10% of public firms were zombie companies in 2019 using slightly more rigorous criteria. And in an even more confusing turn,Deutsche Bank strategist Jim Reid conducted a study in April 2021 that found that over 25% of U.S. companies were zombies in 2020.

For comparison, in the year 2000, only about 6% of U.S. firms were in the same situation, according to Reid’s findings.

Trainer, who has made his name with a few prescient predictions about zombie companies in recent years, also believes that the number of these failing firms in the U.S. has risen dramatically over the past few decades.

But he defines zombie companies using a more holistic method. In Trainer’s view, zombies are firms with less than two years of “lifeline” available based on their average free-cash-flow burn that also struggle to differentiate themselves from competitors, have poor margins, and lack options for future profitable growth.

“So there’s a very low likelihood that the cash burn is ever going to get better,” he said.

Trainer and his team have built a list of roughly 300 publicly traded zombies that they closely track, and while most of them are smaller firms, some have been in the public eye of late.

Stocks like the online car retailer Carvanaand the once-high-flying stationary bike maker Peloton made the list, along with the meme-stock favorites AMC and GameStop.

Carvana declined Fortune’s request for comment. AMC, Peloton, and GameStop did not immediately respond to requests for comment.

In Trainer’s view, many of these zombie companies will eventually see their stock prices drop to $0 as the market recognizes they can’t survive rising interest rates.

Goldman Sachs this week increased its default forecast for U.S. high-yield, or “junk-rated,” corporate bonds this year to 4% from 2.8% after more companies this year have been buckling under their debts.

The cloudier outlook for junk bonds comes as Wall Street feels the squeeze of tighter credit conditions, while bracing for the economic backdrop to get worse.

With more than $11 billion of junk bonds subject to corporate defaults in the first quarter (see chart), the volume now has surpassed the total dollar amount for all of 2021 and 2022.

Corporate defaults were rare before the Federal Reserve started raising interest rates last year. Over the longer term, the junk-bond sector’s average yearly default rate was 4.3% for the past 25 years, according to Goldman data.

Lotfi Karoui’s credit research team at Goldman said, “many investors are asking what the forward pipeline of defaults looks like from here,” in a weekly client note. Concerns have been elevated as corporate defaults jumped to start 2023, with more expected as credit conditions tighten after the failures of Signature Bank SBNY, -22.87% and Silicon Valley Bank.

Distress hits $120 billion

Distressed bond supply in the U.S. junk-bond market hit about $120 billion as of a week ago, according to CreditSights. In the days before the two banks defaulted, there were almost 100 issuers with debt trading in distressed territory, or at a spread of at least 1,000 basis points above Treasury yield, according to CreditSights.

Zombies starting to crater.
The corporate default rate rose in May, a sign that U.S. companies are grappling with higher interest rates that make it more expensive to refinance debt as well as an uncertain economic outlook.

There have been 41 defaults in the U.S. and one in Canada so far this year, the most in any region globally and more than double the same period in 2022, according to Moody's Investors Service.
Through June 22, there were 324 bankruptcy filings, not far behind the total of 374 in 2022, according to S&P Global Market Intelligence. There were more than 230 bankruptcy filings through April of this year, the highest rate for that period since 2010.
Moody's expects the global default rate to rise to 4.6% by the end of the year, higher than the long-term average of 4.1%. That rate is projected to rise to 5% by April 2024 before beginning to ease.

Zombies failing faster now
Chapter 11 bankruptcy filings soared by 68 percent in the U.S. in the first half of the year compared to 2022, according to data shared by Epiq Bankruptcy, a provider of U.S. bankruptcy filing data, on Monday.

Recent data from S&P Global Market Intelligence show that the number of U.S. companies that have gone bankrupt between January and May is higher than in the first five months of any year since 2010.

U.S. corporate borrowers are facing major refinancing risk in the coming years — at a time when funding costs are the highest in 13 years, Moody’s Investors Service said Thursday.

Stubborn inflation is keeping interest rates elevated, meaning companies will have to pay up when they roll over debt.

Issuers of nonfinancial speculative-grade, or high-yield, debt have a record $1.87 trillion of debt maturing in the period running from 2024 to 2028, the ratings company said in a new report. That’s up 27% from the previous record of $1.47 trillion of debt that matures between 2023 and 2027, published in last year’s report. Moody’s has published 26 reports on refinancing risks and the needs of U.S. speculative-grade issuers.

The looming maturity cliff is raising default risk and contributing to rising default rates. Moody’s is expecting the U.S. speculative-grade default rate to peak at 5.6% in January of 2024, before easing to 4.6% by August 2024.


Adding to the overall risk, there’s more debt maturing from lower-rated issuers than usual, with the single B category accounting for 62% of total maturities, Moody’s said. The lowest-rated issuers, those rated Caa to C, hold 11% of maturing debt.

“Debt from distressed companies — those rated Caa and lower — accounts for 19% of 2024-25 maturities, up from 16% due in the first two years of last year’s study,” Moody’s said. “Companies rated Caa and lower will likely find it difficult to refinance maturities at an interest rate they can afford.”


I remember reading of several major corporations and businesses that survived the first part of the Grate Depression...by simply closing their doors, locking up and waiting it out. Ohio's Lima Locomotive Works was one such. The Ford Motor Company, just before the Crash, locked down for six months to change over from the Model T to the new A.

It was possible then, when businesses were run on positive cash balance instead of lines of credit. I know that's impossible now - Lee Iacocca tried something similar around 1990, when, studying Chrysler's see-saw history, boom and bust and several near bankruptcies...he decided to build a war chest.

He did; and Daimler-Benz' managers smelled money, and began a covert hostile takeover. When it was impossible to hide, the CEO, Jurgen Schrempp, pretended to be interested in merger.

It was anything but. Chrysler was looted of cash and then given away to Cerberus as a carcass.

So it's not possible, then...but it would seem that some thought as to how to return to a positive-cash operation, would make for a more-sustainable business, and in the end, a more robust economy.
Could this be a problem?

More than 47,000 UK businesses on ‘brink of collapse’, warn insolvency experts​

25% jump in firms facing ‘critical’ financial distress, with property and construction sectors featuring heavily, says Begbies Traynor

More than 47,000 UK companies are on the brink of collapse after a 25% jump in the number of businesses facing “critical” financial distress in the final three months of 2023, according to a report.

It marks the second consecutive quarter-on-quarter period when critical financial distress has risen by a 25%, the latest “Red Flag” report by insolvency specialists Begbies Traynor found.

The construction and property sectors accounted for 30% of all businesses facing critical financial distress.


Zombies flailing about all over.
What are these "widely expected interest rate hikes?" This would be a significant departure from Japan's historical ZIRP.
Yeah, it was in the news over the last week or so. I didn't post them in the forum here though (maybe I should have).

The Bank of Japan should gradually raise short-term interest rates and make its bond yield control policy more flexible, if inflation stays around its 2% target and is accompanied by sustained wage growth, the OECD said on Thursday.

While the BOJ made tweaks to its yield curve control (YCC) last year to loosen its tight grip on long-term interest rates, markets could challenge the policy again if inflation remains above its 2% target and global yields go up, it said.

The central bank should thus continue efforts to make YCC more flexible, such as by raising the 10-year bond yield target or moving to a short-term yield target, the Organisation for Economic Cooperation and Development (OECD) said.

However, the BoJ kept rates negative just within the last 12 hours or so. The markets still expect rates to rise later this year.
The market consensus is for the BOJ to normalize its rates at its April meeting, once the annual spring wage negotiations confirm a trend of meaningful wage increases.

Japan's central bank believes this trend would encourage consumers to spend and lead to a more sustainable and stable inflation, driven by domestic demand.

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