What if corporate-bond buyers focused less on how quickly they could trade the stuff and more on the basic question of, are they actually going to get their money back?
Because, in a growing number of cases, they may not.
While American companies seem to be in good shape based on a historically low default rate, they look a lot less good if you peek under the hood of their balance sheets.
One problematic sign: the least-creditworthy companies have seen pretty much no growth in a basic measure of their earnings, even after stripping out the embattled energy companies, Bank of America Corp. analysts found. Yet these junk-rated corporations are selling debt at a rapid clip to lock in ultra-low borrowing costs, meaning their levels of debt relative to their income are steadily rising.
Another problematic sign: creditors of companies that are going bankrupt are getting less of their money back than you’d expect given the macro landscape of low defaults, a generally growing economy and such low borrowing costs.
“We find this very worrying,” wrote Bank of America analysts Michael Contopoulos, Neha Khoda and Rachna Ramachandran in a June 11 report. “We believe we are seeing the slow unraveling of fixed-income markets,” and debt of speculative-grade companies won’t be able to hide from such fundamental problems, they wrote.
Winners, Losers
Already, there have been a steady string of such companies running into trouble this year, largely in the energy sector on the heels of a selloff in commodities prices that started last year.
Walter Energy Inc. said Tuesday it is using a 30-day grace period to delay an interest payment to some of its bondholders as it tries to restructure its debt. Samson Resources Corp., the energy producer owned by KKR & Co., is also working to clean up its balance sheet (likely to the detriment of some of its creditors) after the drop in oil values wiped out two-thirds the market value of its bonds.
And indeed, investors are certainly trying to ferret out the losers from the winners, meaning that the one-way trade in the $1.4 trillion U.S. junk bond market is becoming more nuanced. For example, bonds of Wind Acquisition Finance SA have gained 10.4 percent this year, while Bombardier Inc.’s bonds have plummeted 5.1 percent, Bank of America Merrill Lynch index data show.
‘Pretty Bleak’
Distressed bonds, or those that yield more than 10 percentage points over benchmark rates, have lost 0.5 percent this year, the first decline for the debt since a similar period in 2008, amid the worst financial crisis since the Great Depression, the data show.
Now the bloated high-yield bond market is about to be tested. The Federal Reserve is moving closer to raising benchmark interest rates for the first time since 2006, possibly ending an unprecedented era of stimulus that allowed companies to borrow more cheaply than ever.
“Perhaps the biggest issue we have with high yield is that the asset class’s performance has been driven over the last several years not by fundamental strength,” but by quantitative easing and a lack of global yield, the Bank of America analysts wrote. “In fact, the picture painted of the U.S. economy and of high yield in particular is pretty bleak.”
Of course, you could say it’s unlikely for a flood of companies to go belly up after having pushed out their bond maturities until way too far off in the future to think about. There’s some truth to that. But there’s also some real concern that more than six years of near-zero rate central-bank policies have pushed investors to lend to companies that aren’t worthy of their money.
At some point, that discrepancy will need to shake itself out.
Perk Earl on Thu, 11th Jun 2015 3:22 pm
Ah, you mean these fancy fiscal follies have an expiration date when interest rates finally start going back up? Surely you jest! /sarc
joe on Thu, 11th Jun 2015 4:17 pm
Worse still is that to pay on maturity most of them will simply get more debt and sell that. Where is is going? An 18000 Dow Jones tells me allot. Most big lenders are exposed to maybe 1 or 2% on outlay, that’s storing up massive amounts of cash in the long term. TTIP is going to pass and US companies are going to buy Europe out. Then peak oil will leave the US more or less in control of the west and a major player in Pacific region, and the rest will tear itself apart.
Nony on Thu, 11th Jun 2015 4:50 pm
Hey!!!
Whatever happened to the African killer bees? Those things were supposed to be all over the US by now. I remember clear back in the 80s all the angst. And you don’t hear anything now.
Come on doomers…
Apneaman on Thu, 11th Jun 2015 4:55 pm
Spare us your lame assed strawman Nony you fucking imbecile. Run along and play with your Danny Yergin action figures.
Apneaman on Thu, 11th Jun 2015 4:57 pm
I bet you have a Rex Tillerson blow up doll you like to caress and talk dirty money to eh Nony?
Apneaman on Thu, 11th Jun 2015 5:00 pm
Nony, your the second most talented troll in the doomosphere ……………………………………………………………………..all the others are tied for first.
GregT on Thu, 11th Jun 2015 5:10 pm
Hey!!!
The African killer bees are still here Nonymarm. As a matter of fact they have now spread throughout the Southern United States. Of course a simple google search would teach you everything that you ever wanted to know. As of 2014, 40 people are killed every year by Africanized bees.
Come on boy…. stop spending all of your time wanking. There’s plenty for you to learn, if you could only open your eyes……
Nony on Thu, 11th Jun 2015 5:31 pm
40 people probably die from tripping on their shoelaces. I was supposed to be running from swarming bees. And I never even noticed them in San Diego. Heck, we never even hear about them in the news any more. Life goes on. Just another SARS, bird flu, mad cow, blablabla scare.
GregT on Thu, 11th Jun 2015 5:36 pm
You rarely hear anything of importance in the news anymore Nony. It’s 99% corporate drivel.
I got so fed up with all of the easily verifiable falsehoods and lies, that I stopped watching about three years ago.
Maybe that’s why you’re so deluded Nony, watch much TV?
Nony on Thu, 11th Jun 2015 5:44 pm
I just googled around and I think that 30-40 people per year is all stinging deaths. And mostly wasps. AHBs only kill 1-2 per year.
I don’t own a TV.
Nony on Thu, 11th Jun 2015 5:53 pm
Face it. You were wrong about the killer bees so now I don’t trust you on peak oil. Drill, baby, drill.
Apneaman on Thu, 11th Jun 2015 6:10 pm
Do you notice the drought in San Deigo? Or you only see what you want and discount it if it does not affect you daily life? File the bankrupt farmers and unemployed agricultural workers with the bees.
Nony on Thu, 11th Jun 2015 6:20 pm
We used to joke around in San Diego about flushing the toilet extra to use more water that we steal from NOCAL. Would get the liberal SFers angry. Of course this was back in the early 90s the last time we had this big kerfuffle about drought.
But seriously, just let the price float and all this drought stuff will be taken care of fine. Maybe some people will be priced out of rice farming, but big whoop. Food is cheap. And it is kind of crazy to be farming rice in such an arid climate anyway.
GregT on Thu, 11th Jun 2015 6:41 pm
You are right Nony. I stand corrected. 40 deaths per year is from all bees. Africanized ‘killer’ bees, however, have spread throughout the Southern United States and are still a concern. They just aren’t being sensationalized like they were back in the 80s.
Peak oil is an entirely different matter.
Face-Plant on Thu, 11th Jun 2015 7:21 pm
Killer bees was a main stream media scare fad from two decades ago that failed to materialize. So it only stands to reason that peak oil is a communist scam. I fail to see how that thought process is illogical. After all we are in a glut. All problems are because of Obama. Fuck I wish someone would nuke you retards.
GregT on Thu, 11th Jun 2015 7:21 pm
“Food is cheap.”
You’re fortunate then Nony, because up here in Canada food has skyrocketed since oil peaked in 05/06. They’re actually talking of shortages of many items now. Especially produce and meat coming out of the US. Our suppliers are now looking for different sources.
Nony on Thu, 11th Jun 2015 7:29 pm
That’s kharma for all the baby seal clubbing. 😉
GregT on Thu, 11th Jun 2015 7:48 pm
A few more years and they won’t have any habitat left anyways.
Davy on Thu, 11th Jun 2015 8:36 pm
Danny Yergan action figures! Ape Man hammers the NOo!!! Lay down NOo you’ve been humbled.
farmlad on Thu, 11th Jun 2015 9:03 pm
NOo So if you can’t face the subject at hand, you just change it to something that doesn’t keep you up at night. Are you starting to worry about your investments? or how you will be able to make it without any real survival skills?
If thats the case I suggest you start making friends with real doomers and preppers.
Apneaman on Thu, 11th Jun 2015 10:57 pm
Channel Stuffing The Economy: There Has Never Been More Cars “On The Sidelines”
http://www.zerohedge.com/news/2015-06-11/channel-stuffing-economy-there-has-never-been-more-cars-sidelines
justeunperdant on Thu, 11th Jun 2015 11:48 pm
Darwin said that the ones that survive are not the most intelligent nor the strongest but the ones that can adapt to ever changing life conditions. What we see in Greece is the human specie trying to adapt to a world with less available energy. Greece is forcing people to admit that the actual economical system based on debt does not work anymore and need to be reformed . On one side you have Greece trying to force changes and on the other you have the 1% that get great benefit by keeping the actual debt base system alive. What we now see is the beginning of class warfare or the beginning of the human specie trying to adapt to lower available world energy. The human civilization is trying to change and adapt the financial rules (debt) to the new energy reality. Will it work, what will happen, time will time. Greece is part of the western world, unlike Venezuela or Argentina, this is why it matters more what happen in Greece because it will affect all western countries.
Adaption is made of small trial and error. Sometime it works will sometimes in does not. Time will tell
Perk Earl on Fri, 12th Jun 2015 2:28 am
“Channel Stuffing The Economy: There Has Never Been More Cars “On The Sidelines”
Ap, Zerohedge ran the same story about a year ago and as it turns out those parking lots get emptied out and refilled on a recurring basis. The size of the lots is just a reminder of how big the world economy is and how many new cars are sent to dealers to be sold each year.
Davy on Fri, 12th Jun 2015 2:35 am
Just, Greece was a country that was destroyed by the greed of its richest citizens allowed and profited on by Europe’s banks and Europe’s Richest. To a lesser degree the rest of the world played a part especially the Americans with the likes of GS.
Greece is a fascinating example of a developed and educated country going through descent. I am watching Greece very closely. We have much to learn with how Greece adapts to descent. Their people are highly educated and will come up with some interesting ideas and actions. I think we are getting to the moment of truth where Greece leaves the EU and the real SHTF. There are too many people ready to play “uncle”.
It is pretty obvious the 1%’ers want all their money back and Greece is broke. The 1%’ers want to squeeze blood from a turnip and Greece is saying they don’t not have any blood left. It’s a case of greed and corruption at all levels except at the level of normal people struggling as normal people do to pay bills and make a living.
We often microscope the US here on the PO board but what is going on in Europe is pretty trashy too. I am behind the Greek people they deserve better. It is the 1%ers that are doing a Carl Icahn-esk hostile takeover of a country and ready to part it out and sell it off with no regards to the human cost.
If there is a silver lining for Greece they will make the descent with a fully operating global system. Just wait until the rest of us do it in a collapsed global system which is just over the horizon. Our day will come: https://www.youtube.com/watch?v=qw9RVjEN9OI
Steve O on Fri, 12th Jun 2015 8:34 am
Check with snopes on the channel stuffing story:
http://www.snopes.com/photos/automobiles/unsoldcars.asp
Hubbert on Fri, 12th Jun 2015 7:22 pm
I’m sorry but Greece was never a developed country. Much of that was an illusion. I never understood what they actully made in the first place.
Greece never had any real manufacturing industry nor any real natural resource to be borrowing as much as they did in the first place.
Greece has alway been one of the most coorupt countries in the world. Their past had caught up with them.
Perk Earl on Sat, 13th Jun 2015 1:57 am
Hubbert, Greece use to derive revenue from exporting oil, but went past peak a few years back (you’ll have to Google it to get the exact year) and started to import to make up the difference. That is partly why their story is so interesting.
shortonoil on Sat, 13th Jun 2015 7:19 am
“It is pretty obvious the 1%’ers want all their money back and Greece is broke.”
This should get pretty interesting in the US as their bet on a $trillion in high test camel pee goes south. The 1%’ers are going to want the US tax payer to ante up for their losses. It must be getting about time to buy a few more congress-critters. Obviously, Congress must be made aware that we can’t afford things like food stamps when our millionaires can’t afford two new cars every year. Thank goodness we’ve got $1000/ hour Washington Lobbyist to keep things in perspective.
Joe on Sat, 13th Jun 2015 1:25 pm
Nony,how can african bees migrate all over the US when Man and his poisons are killing off all the bee species? Bees in the US have been dwindling in numbers over several years.
Even a child can understand this simple logic.
Joe.
BobInget on Sat, 13th Jun 2015 4:48 pm
Greater Crude Oil Demand, because of terribly wasteful oil wars, (elephant in the room) artificially low oil prices, boosted the economy. Most oil companies are for a time, done exploring for reserves. Instead, the biggest will eat the second biggest and down the line
.
Exxon Mobil, Shell, Chevron are finding, small risk, bargains in debt ridden, financially stuck North American oil and gas markets. Two things are certain in this most uncertain world. Oil wars currently displacing millions on two continents will drag on for years. Secondly, we gotta figure out how to grow more food on less land, managing far trickier water supplies and volatile oil pricing.
Growing the quantiles of food stuffs required to feed stable populations as well as war and climate refugees numbering a billion by 2050, we are gonna need many, many more full oil barrels.
WHEN most of the A&M’s are complete, banksters, Saudi brokers, cover ST contracts and oil prices return to ‘normal’.
Grease, unlike another tourist mecca , Egypt,
is not all tied up in an Islamic World’s bitch fest.
Likely as, Catholics in Spain or Italy won’t be getting mixed up with one Muslim side or the other. IOW’s as the Muslim World becomes more dangerous, Europe prospers.
Given a choice, where would you invest, holiday?
If you were on the board of Exxon, would you risk pouring more money into Russian or Chinese partnerships, take chances in Iraq, the Arctic, Argentina or even Socialist Alberta?
Buying up dinky 600 B p/d wells in Canada won’t cut it. Still, the risks are predictable.
Ten such wells equal six thousand barrels.
Exxon needs a hundred such wells to equal a single GOM giant producer. New GOM permits are at all time lows.
Drilling in ultra deep ocean environments have also lost luster. One rig** Chevron is building has already gone over three Billion with not a drop to show for at least another 18 months.
Shell is doubling down at four Billion in another Arctic adventure.
One more anomaly. The world simply can’t keep
up greater (oil/grains) demand pinching euros, yuan, dollars, loonies, much longer.
**Big Foot
Cloud9 on Sun, 14th Jun 2015 7:06 am
The thing that struck me about Greece was how arid it is. Very rocky hilly parts of the country remind me of the American west. The islands are beautiful. Santorini is breath taking. Still it is very hard to support their population with tourism, olive oil and pistachios.