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Junk Bond Issuance Collapses, “Distress Ratio” Spikes

October 12, 2015

Junk Bond Issuance Collapses, “Distress Ratio” Spikes

Fitch Ratings is fretting about junk-bond defaults. “After five issuer defaults already this month accounting for nearly $2 billion in new volume,” Fitch now expects that the default rate will hit 3.5% by year-end, up from 2.5% to 3% a few days ago. Through September, the trailing 12-month default rate was already 2.9%.

Worse: a 4% default rate by year end is “more likely” than a 3% default rate. And it’s “set to rise further in 2016.”

In non-recessionary periods, the default rate averages 2%. During recessionary periods it averages 11%. That’s why recessions are terrifying for junk-bond holders. Junk bonds are called “junk” for a reason.

We’re not there yet. But the energy and metals & mining sectors are getting there: in September, their default rates were 5% and 10% respectively. Fitch: “These sectors experienced three consecutive months with over $4 billion in defaults, a level not seen since 2009 when monthly volume in the entire market exceeded $4 billion for seven straight months.”

There is a period before default when investors are picking up on the troubles the company is having and demand higher yields in return for taking on the risks. Debt is considered “distressed,” when the spread between its yield and the yield of US Treasuries surpasses 10 percentage points.

The toxic miasma of “distressed debt” is engulfing more and more junk bonds and leveraged loans. Back on September 24, Standard & Poor’s announced that the “distress ratio” for junk bonds, after rising since late last year, hit 15.7%. It was the worst level since December 2011. It was terrible. But now, the distress ratio for junk bonds has soared to 21%.

This chart from LCD HY Weekly shows the distress ratio of junk bonds (red line) and of leveraged loans (blue line). Leveraged loans are generally secured by collateral and hold up better in bankruptcy than bonds, so their yields remain lower even if unsecured bondholders are headed for a total wipeout. Now the distress levels of both are soaring:

US-distress-ratio-bonds-leveraged-loans-2015-10-09

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

Australian housing near world’s most expensive but forecast to rise further

January 15, 2015

Australian housing near world’s most expensive but forecast to rise further

A major ratings agency forecasts Australian home price growth to slow, as the nation approaches an “affordability ceiling”.

Fitch Ratings is forecasting 4 per cent growth in Australian residential property prices this year, down from around 7 per cent in 2014.

In its 2015 Global Housing and Mortgage Outlook report, Fitch finds that Australian homes are the third most expensive of the 22 countries it looks at on the level of prices compared with rents and also compared with incomes.

“Australian property remains among the most expensive on almost all metrics,” noted the report.

“With almost 25 years of continuous GDP growth, record low rates and stable unemployment, Fitch expects Australian prices to remain high and affordability likely to slightly worsen in the near term before levelling off as it reaches an affordability ceiling.”

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

 

Russia Cut to One Step Above Junk by Fitch on Oil, Sanctions

January 11, 2015

Russia Cut to One Step Above Junk by Fitch on Oil, Sanctions

Russia’s credit rating was cut to the lowest investment grade by Fitch Ratings after plummeting oil prices and the conflict over Ukraine triggered the worst currency crisis since the country’s 1998 default.

Fitch, which last downgraded Russia in 2009, cut the sovereign one step to BBB-, according to a statement issued Friday in New York. The grade, on par with India and Turkey, has a negative outlook.

“The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the ruble, coupled with a steep rise in interest rates,” Fitch said in the statement. “Plunging oil prices have exposed the close link between growth and oil.”

The world’s biggest energy exporter is on the brink of a recession after crude fell more than 50 percent since June and the U.S. and its allies imposed sanctions following President Vladimir Putin’s annexation of Crimea from Ukraine in March. The penalties have locked Russian corporate borrowers out of international debt markets and curbed investor appetite for the ruble, stocks and bonds.

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

 

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