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Default Rate Highest since 2009, US Distress Ratio Soars.

Standard & Poor’s slashed the credit ratings of 112 corporations around the globe to default (D) or selective default (SD) in 2015, according to S&P Capital IQ Global Credit. The highest number of global defaults since nightmare-year 2009, when a previously unthinkable 268 companies defaulted, and not far behind the second highest default tally of 125, in 2008.

The oil & gas sector led with 29 defaulters (26% of the total). Metals, mining, and steel followed with 17 defaulters (15% of the total). The consumer products sector and the bank sectors tied for the third place, each with 13 defaulters (12% of the total).

So where are the defaulters? In Russia and Brazil? The economies of both countries have been ravaged by deep recessions and other problems. They rank high on the list but the country with most of the defaulters is… the US.

In total, 66 defaulters were US issuers, up 100% from 33 in 2014, and the highest since 2009. US defaulters accounted for 59% of the global total. Some of this dominant share of defaulters can be attributed to the size of the US economy and the enormous size of its credit market. But the US is also the epicenter of oil & gas defaults, with contagion now spreading to other sectors.

An indication of what’s coming in 2016 is the Standard & Poor’s Distress Ratio. It’s the proportion of junk-rated bonds with yields that exceed Treasury yields by at least 10 percentage points (option-adjusted spread). And this Distress Ratio soared in December to 24.5%, up from around 5% in 2014. There are now 437 bond issues tangled up in the ratio:

US-SP-Distress-ratio-2013-2015

Of those 437 bond issues in the Distress Ratio, 127 have been issued by oil & gas companies. The metals, mining, and steel sector has 71 bond issues in the ratio. The remaining 239 issues are spread over other sectors. And a number of these distressed issuers will default down the line. So defaults in the US are likely to get even uglier in 2016.

…click on the above link to read the rest of the article…

The Big Short is a Great Movie, But…

January 5, 2016

The Big Short is a Great Movie, But…

Paris — Michael Lewis is the chronicler of Wall Street. He takes the complexity behind which the inhabitants of the financial world hide and weaves a tale that is both understandable and compelling. Starting with the classic “Liars Poker” (1989), Lewis has produced a number of books about the financial markets including “Flash Boys: A Wall Street Revolt” (2014) and “The Big Short: Inside the Doomsday Machine” (2010). Working with director Adam McKay and some great actors and screen writers, Lewis has managed to produce what is perhaps the most accessible and relevant treatment of the mortgage boom and financial bust of the 2000s, and the subsequent 2008 financial crisis.

The beauty of “The Big Short,” both as a movie and a book, is that it provides sufficient detail to inform the general audience about events and issues that are not part of everyday life. Wall Street is a secretive place, but “The Big Short” manages to convey enough of the details to make the story credible as a journalistic effort, yet also enormously entertaining. Lewis does this with two essential ingredients of any film: a simple story and compelling characters.

Images of greed and stupidity are presented like Italian frescos in “The Big Short,” pictures that are memorable and thought provoking. Indeed, what many people know and remember years from now about the 2008 financial crisis will be shaped by creative efforts such as “The Big Short” for the simple reason that Lewis has simplified the description into a manageable portion. Unlike hedge fund manager Michael Burry (played by Christian Bale), most people lack the patience and expertise to sift through and understand reams of financial data.

…click on the above link to read the rest of the article…

The Shale Defaults Begin Here: Banks Quietly Shrink These 25 Companies’ Credit Facilities

January 5, 2016

The Shale Defaults Begin Here: Banks Quietly Shrink These 25 Companies’ Credit Facilities

Everyone knows that at $35/barrel oil, virtually every US shale company is cash flow negative and is therefore burning through cash and other forms of liquidity such as bank revolvers and term loans, just as everyone knows that should oil remain at these prices, the US shale sector is facing an avalanche of defaults.

What is less known is who will be the next round of companies to default.

One good place to get an answer is to find which companies’ bankers are quietly tightening the liquidity noose (because they don’t want to be stuck holding worthless assets in bankruptcy or for whatever other reason), by quietly reducing the borrowing base on existing credit facilities.

It is these companies which find themselves inside this toxic feedback loop of declining liquidity, which forces them to utilize assets even faster, thus even further shrinking the borrowing base against which their banks have lent them money, that will be at the forefront of the epic bankruptcy wave that is waiting to be unleashed across the US, leading to tens of billions of defaults junk bonds over the next 12-18 months.

So, without further ado here are 25 deeply distressed companies, whose banks we found have quietly shrunk the borrowing base of their credit facilities anywhere from 6% in the case of Black Ridge Oil and Gas to a whopping 51% for soon to be insolvent New Source Energy Partners.

Source: Bloomberg

What Comes After The Commodities Bust?

January 5, 2016

What Comes After The Commodities Bust?

The days of E&P companies using external debt financing to fuel growth have most likely come to a close.

The one thing executives should have learned in 2015 is that Wall Street can for long periods of time remain disconnected from fundamentals and can swing to extremes. Another lesson from 2015 is that OPEC can no longer be relied upon to set prices.

Thus, the debt fueled financing boom in the shale space will most likely never return.

As a result, the industry will likely move to self-funding capital expenditures through free cash flow generation in an attempt to significantly reduce its reliance on leverage. Debt levels will initially have to be reduced, significantly fueling a cycle of dramatically lower capital expenditures and consolidation. This process is already underway, but still has a long way to go.

When the internet bubble burst in 2001, only the business models that generated cash vs subscriber growth and cash burn survived and continued to get funded. Furthermore, larger companies survived and thrived as the smaller ones got starved for cash, died or dramatically scaled back subscriber acquisition to achieve a positive cash flow. We are about to experience the same consequences of misguided investments from a Federal Reserve-inspired bubble.

The toxic combination of lower capital expenditures and constrained output will result in another spike in prices, one that few will anticipate. The current Federal Reserve policy, which isn’t conducive to higher commodity prices, will also make the price spike more difficult to see ahead of time. However, in the interim, until policy changes at the Fed or OPEC are enacted, prices will remain below the marginal cost to maintain production.

…click on the above link to read the rest of the article…

Puerto Rico Is Greece, & These 5 States Are Next To Go

January 3, 2016

Puerto Rico Is Greece, & These 5 States Are Next To Go

As Wilbur Ross so eloquently noted, for Puerto Rico “it’s the end of the beginning… and the beginning of the end,” as he explained “Puerto Rico is the US version of Greece.” However, as JPMorgan explains, for some states the pain is really just beginning as Municipal bond risk will only become more important over time, as assets of some severely underfunded plans are gradually depleted.

Wilbur Ross discusses Puerto Rico’s debt struggles and where it goes from here…

But, as JPMorgan details, Muni risk is on the rise for US states, but broad generalizations do not apply (in other words, these five states are ‘screwed’)…

The direct indebtedness of US states (excluding revenue bonds) is $500 billion. However, bonds are just one part of the picture: states have another trillion in future obligations related to pension and retiree healthcare. In the summer of 2014, we conducted a deep-dive analysis of US states, incorporating bonds, pension obligations and retiree healthcare obligations. After reviewing over 300 Comprehensive Annual Financial Reports from different states, we pulled together an assessment of each state’s total debt service relative to its tax collections, incorporating the need to pay down underfunded pension and retiree healthcare obligations.

While there are five states with significant challenges (Illinois, Connecticut, Hawaii, New Jersey, and Kentucky) , the majority of states have debt service-to-revenue ratios that are more manageable.

As a brief summary, we computed the ratio of debt, pension and retiree healthcare payments to state revenues. The blue bars show what states are currently paying. The orange bars show this ratio assuming that states pay what they owe on a full-accrual basis, assuming a 30-year term for amortizing unfunded pension and retiree healthcare obligations, and assuming a 6% return on pension plan assets.

…click on the above link to read the rest of the article…

The Damage Has Been Done And The Consequences Will Be Suffered: “Have a Healthy Storage of Food, Precious Metals and Necessary Supplies”

January 1, 2016

The Damage Has Been Done And The Consequences Will Be Suffered: “Have a Healthy Storage of Food, Precious Metals and Necessary Supplies”

While the band plays on and Americans celebrate New Year’s many have no idea what may be in store in 2016. Mainstream financial pundits like to paint a rosy picture of the current economic conditions, suggesting that the government’s green shoots of yesteryear have now turned to full blown money trees, wherein consumers are spending, businesses are selling and everyone has an unlimited flow of cash.

But as noted by analysts at CrushTheStreet.com in their latest video report, “what we have become accustomed to in terms of normal is rapidly coming to an end.”

Indeed, with the Federal Reserve recently having raised interest rates, corporate bond markets starting to crack, and abysmal sales numbers over the holiday season, 2016 could very well spell disaster for financial markets, including government bonds.

So serious is the potential destruction to come that, according to the report, you’d better be ready with an alternate monetary mechanism of exchange such as gold or silver, as well as food and other stockpiles to mitigate supply disruptions and shortages.

Watch Perfect Storm Market Collapse courtesy of Crush The Street:

What we have become accustomed to in terms of normal is rapidly coming to an end… the global monetary experiment is literally bursting at the seams.

…

The economy is more dependent now than ever on the circulation of increasing systemic leverage.

…

The damage has been done and the consequences will be suffered… A loss of faith in the dollar will be a loss of faith in credit… and when perceived value in credit is lost, prices in the bond markets will collapse… Already we are seeing bonds outside of government debt implode.

…click on the above link to read the rest of the article…

A Year of Sovereign Defaults?

January 1, 2016

A Year of Sovereign Defaults?

MIAMI – When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).

If history is a guide, such conversations may be happening a lot in 2016.

Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.

The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.

Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.

And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises.

…click on the above link to read the rest of the article…

Puerto Rico To Default On Some Bonds January 1 – Live Feed

December 30, 2015

Puerto Rico To Default On Some Bonds January 1 – Live Feed

Puerto Rico governor Alejandro Garcia Padilla is set to address the island’s debt problem at a press conference on Wednesday.

PUERTO RICO SAYS IT WILL DEFAULT ON SOME DEBT DUE JAN. 1
PUERTO RICO TO MISS $1.4 MILLION DUE ON PFC BONDS DUE JAN. 1
PUERTO RICO TO MISS $35.9 MILLION DUE ON PRIFA BONDS
PUERTO RICO TO MAKE JAN. 1 GENERAL OBLIGATION DEBT PAYMENT

Nearly $1 billion comes due on Friday, some $330 million of which is GO debt. Because a full payment is next to impossible, Padilla must decide who gets paid and who doesn’t. Live feed:

And the reaction in the monolines:

* * *

Background

In what’s starting to feel a bit like the Greek saga that unfolded over the summer, Puerto Rico is facing another “D-Day” on January 1 when nearly $1 billion is due to creditors.

For those unfamiliar with the story, the commonwealth is struggling to crawl from under a debt pile that sums to about $70 billion but has thus far been unable to wrench concessions from Congress on restructuring in bankruptcy.

Earlier this month, the island struck a deal with the monolines that will let a previously agreed restructuring for around $8 billion in PREPA debt go ahead, and while some hope that could serve as a kind of template for the rest of Puerto Rico’s obligations, analysts and government officials alike think that’s unlikely given the complexity involved.

On December 1, Governor Alejandro Garcia Padilla used a revenue clawback mechanism in order to make a $354 million payment. The end-around effectively allowed Padilla to divert funds from other agencies that have issued bonds in order ensure the government could make good on its GO debt. A default on the GO portion (around $330 million) of what comes due on Friday would trigger a wave of messy litigation and is a situation Padilla wants to avoid at all costs.

…click on the above link to read the rest of the article…

Puerto Rico’s Debt Trap

December 29, 2015

Puerto Rico’s Debt Trap

WASHINGTON, DC – The Caribbean island of Puerto Rico – the largest United States “territory” – is broke, and a human calamity is unfolding there. Unless a constructive course of political action is found in 2016, Puerto Rican migration to the 50 states will rival the scale of the 1930s Dust Bowl exodus from Oklahoma, Arkansas, and other climate-devastated states.

With public debt service (principal plus interest) projected to reach nearly 40% of government revenue in 2016, Puerto Rico needs a new set of economic policies. But austerity will not work; this must be an investment-led recovery, with official measures oriented toward boosting growth by reducing the cost of doing business.

The question is whether Puerto Rico will have that option. Much of its $73 billion debt has been issued by government corporations. But, though federal law allows such municipal debt to be restructured under Chapter 9 of the bankruptcy code in all 50 states, this does not apply to US territories like Puerto Rico. As a result, a protracted series of confusing legal battles and selective defaults looms. The cost of essential infrastructure services – electricity, water, sewers, and transportation – will go up while quality declines.

One response has been to demand further belt-tightening, for example, in the form of wage reductions and healthcare cuts. But residents of Puerto Rico are also US citizens and they vote with their feet – the population has fallen from 3.9 million to 3.5 million in recent years as talented and energetic people have moved to Florida, Texas, and other parts of the mainland.

The more creditors insist on lower living standards and higher taxes, the more the tax base will simply leave the island – causing bondholders’ losses to rise. Disorganized defaults by public corporations will make it hard for any part of the private credit system to function.

…click on the above link to read the rest of the article…

The Credit Crunch Is Back: Banks Scramble To Collateralize Loans To Record Levels

December 27, 2015

The Credit Crunch Is Back: Banks Scramble To Collateralize Loans To Record Levels

One of the biggest quandaries of this cycle for the US economy has been the amount and growth of commercial bank loans. Virtually non-existent for the first three years of the centrally-planned new normal, something changed in 2012 at which point US bank loans, led by Commercial and Industrial or C&I lending growing at a double-digit pop, started to rise at an impressive pace, asking many to wonder: maybe the biggest driver for a sustainable economic recovery is in fact present, because where there is loan demand, there is velocity of money.

A few years later, as the loan growth persisted with virtually no flow through to GDP growth, we – and others – wondered: we know there is a “source of funds”, but what about the “use of funds” – how can banks be creating tens of billions in loans if virtually nothing was ending up in the broader economy?

The first flashing red flag appeared last July, when we reported that companies were using secured bank debt to repurchase stock: a stunning, foolhardy development, comparable to taking out a mortgage on one’s house and using the proceeds to buy deep out of the money calls on the S&P 500. This is what the FT said at the time:

For the top 25 US commercial banks by assets, C & I lending grew by 10.5 per cent in the quarter to June 25 from the previous quarter, according to annualised weekly data from the Federal Reserve.

This type of lending is an important source of business for the largest US banks, representing about a fifth of all loans made by the likes of Bank of America, JPMorgan Chase and Wells Fargo, according to Citigroup research. While low interest rates have made business lending less lucrative, the relationships it forges open doors for the banks to sell other services such as treasury management, hedging and leasing.

…click on the above link to read the rest of the article…

Chinese State Firms’ Debt Hits New All Time High, As Profits Tumble

December 25, 2015

Chinese State Firms’ Debt Hits New All Time High, As Profits Tumble

Overnight China’s finance ministry reported the latest data on state-owned firms profitability. At a cumulative CNY 2.04 trillion (or $316 billion) for the January-November period, this was another nearly double digit decline, or -9.5% from the year ago period, following a -9.8% drop for the 10 month period the month before.

State-backed financial companies, which in China is redundant as all financial companies are state-backed, were responsible for roughly a third of the cumulative profit decline: excluding financial firms, combined revenues of state-owned firms fell 6.1% in the first 11 months from a year earlier to 40.7 trillion yuan, the ministry said.

According to Reuters, companies in transportation, chemical and power sectors reported a rise in profit in the January-November period, while firms in oil, petrochemicals and building materials – or a vast majority of them – saw a drop in earnings. Firms in steel, coal and non-ferrous metal sectors continued to suffer losses.

“The downward pressure on economic operations remains relatively big, although there are signs of warming up in some indicators,” the ministry said.

This optimism is, however, entirely baseless and we are confident that Chinese corporate profitability is set to go from bad to even worse. The reason for that is that at current commodity prices and production, virtually all of China’s steel industry is loss-making, while over half of commodity companies with debt do not have the funds to make even one coupon payment.

While the logical response to plunging profits would be for the government to enforce a strict discipline for excess capacity reduction, Beijing has been unwilling to do this, afraid of the outcome from the resulting surge in corporate defaults.

…click on the above link to read the rest of the article…

Oil Bankruptcies Hit Highest Level Since Crisis And There’s “More To Come”, Fed Warns

December 25, 2015

Oil Bankruptcies Hit Highest Level Since Crisis And There’s “More To Come”, Fed Warns

“Two things become clear in an analysis of the financial health of US hydrocarbon production: 1) the sector is not at all homogenous, exhibiting a range of financial health; 2) some of the sector indeed looks exposed to distress [and] lifelines for distressed producers could include public equity markets, asset sales, private equity, or consolidation. If all else fails, Chapter 11 may be necessary.” That’s Citi’s assessment of America’s “shale revolution”, which the Saudis have been desperately trying to crush for more than a year now.

As Citi and others have noted – a year or so after we discussed the issue at length – uneconomic producers in the US are almost entirely dependent on capital markets for their continued survival. “The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow,” Citi wrote in September. Here’s a look at what the bank means:

Of course this all worked out fine in an environment characterized by relatively high crude prices and ultra accommodative monetary policy. The cost of capital was low and yield-starved investors were forgiving, allowing the US oil patch to keeping drilling and pumping long after it should have been bankrupt. Now, the proverbial chickens have come home to roost. In the wake of the Fed hike, HY is rolling over and as UBS noted over the summer, “the commodity related industries total 22.8% of the overall HY market index on a par-weighted basis; sectors most at-risk for defaults (defined as failure to pay, bankruptcy and distressed restructurings) total 18.2% of the index and include the oil/gas producer (10.6%), metals/mining (4.7%), and oil service/equipment (2.9%) industries.”

…click on the above link to read the rest of the article…

Ukraine’s Looming “19 Fukushimas” Scenario

December 25, 2015

Ukraine’s Looming “19 Fukushimas” Scenario

With all the action in Syria, the Ukraine is no longer a subject for discussion in the West. In Russia, where the Ukraine is still a major problem looming on the horizon, and where some 1.5 million Ukrainian refugees are settling in, with no intentions of going back to what’s left of the Ukraine, it is still actively discussed. But for the US, and for the EU, it is now yet another major foreign policy embarrassment, and the less said about it the better.

In the meantime, the Ukraine is in full-blown collapse – all five glorious stages of it – setting the stage for a Ukrainian Nightmare Before Christmas, or shortly after.

Phase 1. Financially, the Ukrainian government is in sovereign default as of a couple of days ago. The IMF was forced to break its own rules in order to keep it on life support even though it is clearly a deadbeat. In the process, the IMF stiffed Russia, which happens to be one of its major shareholders; what gives?

Phase 2. Industry and commerce are approaching a standstill and the country is rapidly deindustrializing. Formerly, most of the trade was with Russia; this is now over. The Ukraine does not make anything that the EU might want, except maybe prostitutes. Recently, the Ukraine has been selling off its dirt. This is illegal, but, given what’s been happening there, the term “illegal” has become the stuff of comedy.

Phase 3. Politically, the Ukrainian government is a total farce. Much of it has been turned over to fly-by-night foreigners, such as the former Georgian president Saakashvili, who is a wanted criminal in his own country, which has recently stripped him of his citizenship. The parliament is stocked with criminals who bought their seat to gain immunity from prosecution, and who spend their time brawling with each other.

…click on the above link to read the rest of the article…

The Trade Wars Begin: U.S. Imposes 256% Tarriff On Chinese Steel Imports

December 23, 2015

The Trade Wars Begin: U.S. Imposes 256% Tarriff On Chinese Steel Imports

Two weeks ago, when looking at the latest import price index data, we showed something disturbing: China has become an all out exporter of deflation. As the chart below shows, In November, import prices from China decreased 1.5% over the past 12 months, the largest year-over-year drop since the index declined 1.7% for the year ended in January 2010.

How did this happen? As we explained, with all of its domestic markets fully saturated, China has had no choice but to export its soaring commodity production as we explained in “Behold The Deflationary Wave: How China Is Flooding The World With Its Unwanted Commodities.”

As we noted then, shipments of steel, oil products and aluminum are reaching for new highs, according to trade data from the General Administration of Customs. That’s because mills, smelters and refiners are producing more than they need amid slowing domestic demand, and shipping the excess overseas.

Logically, the less domestic demand for steel, and the greater China’s steel exports, the lower the price continues to tumble, now at a 10 year low.

…click on the above link to read the rest of the article…

On the 19th day of Christmas…

December 22, 2015

On the 19th day of Christmas…

With all the action in Syria, the Ukraine is no longer a subject for discussion in the West. In Russia, where the Ukraine is still a major problem looming on the horizon, and where some 1.5 million Ukrainian refugees are settling in, with no intentions of going back to what’s left of the Ukraine, it is still actively discussed. But for the US, and for the EU, it is now yet another major foreign policy embarrassment, and the less said about it the better.

In the meantime, the Ukraine is in full-blown collapse—all five glorious stages of it—setting the stage for a Ukrainian Nightmare Before Christmas, or shortly after.

Phase 1. Financially, the Ukrainian government is in sovereign default as of a couple of days ago. The IMF was forced to break its own rules in order to keep it on life support even though it is clearly a deadbeat. In the process, the IMF stiffed Russia, which happens to be one of its major shareholders; what gives?

Phase 2. Industry and commerce are approaching a standstill and the country is rapidly deindustrializing. Formerly, most of the trade was with Russia; this is now over. The Ukraine does not make anything that the EU might want, except maybe prostitutes. Recently, the Ukraine has been selling off its dirt. This is illegal, but, given what’s been happening there, the term “illegal” has become the stuff of comedy.

Phase 3. Politically, the Ukrainian government is a total farce. Much of it has been turned over to fly-by-night foreigners, such as the former Georgian president Saakashvili, who is a wanted criminal in his own country, which has recently stripped him of his citizenship. The parliament is stocked with criminals who bought their seat to gain immunity from prosecution, and who spend their time brawling with each other. Prime Minister Yatsenyuk was recently hauled off the podium by his crotch; how dignified is that?

…click on the above link to read the rest of the article…

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