Come on You Default Junkies, You Know You Want It

This is what I’m wondering: If you had two pots, and in one you dropped a nickel every time a company defaulted on its debt, and in the other you dropped a nickel every time an analyst made a prediction about default rates, which pot would poke its eyes out because it can’t bear to read another word about default rates?

Sorry to jest about a subject so really and truly vital to the livelihood of leveraged loan and high yield bond investors, but even you guys have got to be sick of hearing about defaults and the rate at which they have come, are coming and will come.

What’s that? You’re not?!? Awesome, because I’m about to give into an overwhelming urge to point out that, within the abundance of predictions to be found, there are those who believe the default rate is actually on its way down.

Not everyone of course. So here you have a variety of opinions ranging from the gloomiest to the brightest.

As of July 6, Fitch Ratings was standing its ground with a prediction that the U.S. default rate would end this year in a range of 15% to 18%. While in a July 10 report, Standard & Poor’s offered a glass-half-full to glass-half-empty range—it expects the default rate to hit 14.3% by the end of first-quarter 2010, with a pessimistic scenario of 18.5% and an optimistic scenario of 11.5%.

Moody’s Investors Service, meanwhile, cut its predicted peak for the U.S. high yield default rate, which it expects this November, to 12.9% in early July from 13.5% in early June. As recently as January 2009, Moody’s was forecasting a 16.4% peak.

Why the reduction? JPMorgan can tell you. The bank’s analysts believe that the flurry of new deals on the high yield market may help bring the number of defaults down. They now predict the rate for high yield bonds will climb to only 9% this year and drop to 7% in 2010. Before the rally in the high yield bond market, JPMorgan forecasted defaults peaking at 12% by the end of the year and dropping to 10% in 2010.

CLO managers, for their part, are split on when the peak will hit. Nearly half, or 45.3%, of the 134 CLO managers who responded to an S&P survey believe the peak for leveraged loan defaults will come in the first half of 2010. Another 29.9% fell in line with the end of the year thinking.

And there you have it, hopefully, with your eyes still in their proper place.

Recent Posts

Investors Win Warner Chilcott Battle, But Expect a War

Investors this week pushed back on Warner Chilcott’s attempt to reduce pricing on its $1.95 billion term loan B, but most don’t believe the market’s repricing fight is over...

Bad Buyouts and What We Could Do about Them

Allied Stores. Burlington Industries. Charter Medical. E-H Holdings. Federated Department Stores… These companies are among the 13 that, between 1985 and 1989, issued a billion or more in junk bonds to help fund a buyout—then promptly went bankrupt...

A Repeat of 2009 Returns? Not. But No Disasters Either

As we here at Leveraged Finance News join you in saying goodbye to 2009 and looking ahead at the year to come, two little words spring to mind: do over? Maybe not all of it, but certainly returns...

Cha-Ching! High Yield Brings High Bonuses

While returns in the 40% to 50% range portend a 2009 Grinch-free holiday season for most leveraged loan and high yield bond professionals, those dedicated to selling and trading junk bonds are on track to receive the highest bonuses...

Index of Posts

0 Comments