A DEADLYWAVE THAT CANNOT BE STOPPED
It’s a massive wave of bankruptcies . The list of companies that have defaulted on their debt grows by the day. It includes rental-car giant Hertz Global... retailers JC Penney, Neiman Marcus, J.Crew, and Pier 1 Imports... newspaper publisher McClatchy... burger joint Krystal... telecom Frontier Communications... and oil and gas producers Diamond Offshore Drilling and Whiting Petroleum. And this is just the beginning... The list will get much longer in the months ahead. Many more companies will follow in the footsteps of these victims... Other companies teetering on the edge of bankruptcy include retailers Lord & Taylor, Sur La Table, Party City, GNC, and Guitar Center, as well as energy firms Chesapeake Energy and Denbury Resources. Bloomberg estimates that nearly two-thirds of publicly traded restaurants are at risk of going under.
The high-yield default rate equals about 4% today. That means only 4% of all corporate borrowers have defaulted over the past year. Thanks to the coronavirus and its effects on the economy, credit-ratings agency Standard & Poor’s (S&P) currently forecasts that the default rate will rise to 10% by the end of the year. While that’s a big jump in a short span... I believe it’s too conservative . To know where the default rate is headed, you need to look at the number of companies whose credit has already been downgraded. Credit downgrades always precede defaults. And as you can see in the chart below, downgrades have soared to unprecedented levels... So far this year, S&P has downgraded the credit of more than 1,650 companies. That’s already more than any year on record... and we’re not even halfway through. We’ve never seen anything like this... It tells us that the number of defaults (bankruptcies)
14%
A WAVE OF DOWNGRADES
100 200 300 400 500 600 700 800 900
12%
10%
Where do you think the default rate is headed?
8%
DOWNGRADES
6%
DEFAULT RATE
4%
2%
2008
2010
2012
2014
2016
2018
2020
Source: Standard &Poor's, Bloomberg
20
June 2020
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