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Here Comes The Wave: Loan Defaults Hit 6 Years High
Here Comes The Wave: Loan Defaults Hit 6 Years High
Two weeks ago, when looking at the recent flurry of chapter 11 filings and a striking correlation between the unemployment rate and loan delinquencies, we said that a “biblical” wave of bankruptcies is about to flood the US economy.
It now appears that the wave is starting to coming because according to Fitch, the monthly tally of defaults in the U.S. leveraged loan market has hit a six-year high, as companies are either missing payments or filing for bankruptcy because of the fallout from the coronavirus pandemic.
According to the latest Fitch Leveraged Loan Default Index data, the total amount of defaults in this high-risk, high-yielding area of the debt markets at $12.6 billion in May so far, the highest since April 2014, bringing the leveraged loan default total for the year to date is $33.3 billion.
At the end of April, the trailing 12-month default rate jumped to 2.8%, compared to just 1.8% at the end of last year. Fitch forecast that U.S. leveraged loan defaults would reach $80 billion in 2020, surpassing the previous high of $78 billion in 2009.
While many expect the US shale sector to lead in the coming default spike, US retailers have accounted for the bulk of defaults over the past two months, as they were forced to temporarily close stores in response to the COVID-19 pandemic. For now, energy remains in 5th spot after the telecom, services, and manufacturing sectors.
Retailers Neiman Marcus Group, J.Crew and J.C. Penney all filed for Chapter 11 bankruptcy protection this month in the United States, while Chesapeake Energy said this month it was unable to access financing and was considering a bankruptcy court restructuring of its over $9 billion debt if oil prices did not recover from the sharp fall caused by the COVID-19 pandemic.
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Weekly Commentary: Comeuppance
Weekly Commentary: Comeuppance
The Chinese Credit machine sputtered in July. Growth in Total Aggregate Financing dropped to $144 billion, almost 40% below consensus estimates. This was less than half of June’s $320 billion increase and the slowest expansion since February. The sharp slowdown was beyond typical seasonality, with the month’s growth in Aggregate Financing 18% below July 2018. Despite July’s weak growth, Total Aggregate Financing was still up 10.7% over the past year.
New Bank Loans fell to $150 billion from June’s $235 billion, with growth 28% below that from July 2018. At $2.331 TN, New Loans were still up 12.6% over the past year. Consumer Loans dropped to $74 billion, the weakest showing since February. Consumer Loans were nonetheless up 16.5% over the past year, 38% in two, 71% in three and 138% over five years.
Loans to the non-financial corporate sector collapsed in July to $42 billion, about a third June’s level. Somewhat offsetting this decline, Corporate bond issuance almost doubled in July to $32 billion.
The ongoing contraction in “shadow” finance accelerated in July, with declines in outstanding Trust Loans, Entrusted Loans, and Banker Acceptances. On a year-over-year basis, Trust Loans were down 4.3%, Entrusted Loans 10.0% and Bankers Acceptances 15.0%.
China’s July Credit data were alarming on multiple levels. For starters, the sharp Credit slowdown supports the view that financial conditions tightened meaningfully after the government takeover of Baoshang Bank (and attendant money market instability). It also raises the increasingly pressing question as to the willingness of the banking system to continue to take up the slack in the face of a broadly deteriorating backdrop. And in a new development, analysts have begun contemplating the possibility of waning Credit demand.
The sharp pullback in Consumer Loans raises the specter of an inflection point in household mortgage borrowings. Bubbling apartment markets have supported a resilient consumer sector along with an unrelenting housing construction boom. Government tightening measures may be having some impact. It is possible as well that market sentiment has begun to shift.
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Ex-Im Bank is Welfare for the One Percent
Ex-Im Bank is Welfare for the One Percent
This month Congress will consider whether to renew the charter of the Export-Import Bank (Ex-Im Bank). Ex-Im Bank is a New Deal-era federal program that uses taxpayer funds to subsidize the exports of American businesses. Foreign businesses, including state-owned corporations, also benefit from Ex-Im Bank. One country that has benefited from $1.5 billion of Ex-Im Bank loans is Russia. Venezuela, Pakistan, and China have also benefited from Ex-Im Bank loans.
With Ex-Im Bank’s track record of supporting countries that supposedly represent a threat to the US, one might expect neoconservatives, hawkish liberals, and other supporters of foreign intervention to be leading the effort to kill Ex-Im Bank. Yet, in an act of hypocrisy remarkable even by DC standards, many hawkish politicians, journalists, and foreign policy experts oppose ending Ex-Im Bank.
This seeming contradiction may be explained by the fact that Ex-Im Bank’s primary beneficiaries include some of America’s biggest and most politically powerful corporations. Many of Ex-Im Bank’s beneficiaries are also part of the industrial half of the military-industrial complex. These corporations are also major funders of think tanks and publications promoting an interventionist foreign policy.
Ex-Im Bank apologists claim that the bank primarily benefits small business. A look at the facts tells a different story. For example, in fiscal year 2014, 70 percent of the loans guaranteed by Ex-Im Bank’s largest program went to Caterpillar, which is hardly a small business.
Boeing, which is also no one’s idea of a small business, is the leading recipient of Ex-Im Bank aid. In fiscal year 2014 alone, Ex-Im Bank devoted 40 percent of its budget — $8.1 billion — to projects aiding Boeing. No wonder Ex-Im Bank is often called “Boeing’s bank.”
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