Executive Intelligence Review

FROM EIR DAILY ALERT


Moody’s: ‘Particularly Large Default Wave’ Coming on Company Debt

May 27, 2018 (EIRNS—The ratings agency Moody’s Investors Service has given the clearest warning yet of the possibility of a U.S. corporate debt blowout on the horizon.

A new report issued by Moody’s says that the junk debt in the U.S. corporate sector now amounts to approximately $3.7 trillion, and that $2 trillion of that belongs in a new designation created by Moody’s: “highly speculative” (graded B1 or lower) as opposed to merely “speculative.”

Internationally, the report says, a full 58% of all non-financial companies are now given the debt rating “speculative” by the ratings agency; and 40% are given the rating “highly speculative.”

Getting to the point, the report, as quoted by CNBC on May 25, says,

“Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing [their] maturing debt. A number of very weak issuers are living on borrowed time while benign conditions last.”

These are the so-called “zombie companies” much discussed in financial analyses of the European economies; and again, Moody’s is raising the possibility this May approximate 40% of non-financial companies.

The report concludes that

“The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress arrives.”

That stress period has arrived, in fact, with dollar-linked interest rates rising at a faster pace than the Federal Reserve is raising its key rates. Plunging currency values hitting those countries with large amounts of dollar debt, such as Argentina, Turkey and Brazil, are one sign. The U.S. corporate debt bubble itself is set to implode at some point in this process, as Moody’s and the IMF warned already one year ago. Though not reported here, there has been a 4% drop so far in 2018 in the value of the average corporate bond, internationally.

Intersecting this is the indication that the “long time Deutsche Bank has been taking to die” May soon come to an end unless that giant derivative bank is thoroughly reorganized.

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