Leaving ugly skid marks on the economy, banks, and investors.
The “end of the credit cycle” is a harmless-sounding moniker for an era when defaults and bankruptcies suddenly re-materialize, as if out of nowhere, and when investors get to eat big losses in what they thought were conservative investments.
It’s when new money for Corporate America gets a little more skittish, and credit just a little tighter – not all at once, but over time. And for over-indebted junk-rated companies, that slight tightening and the accompanying rise in rates at the top triggers liquidity crises, defaults, and bankruptcies at the bottom.
Ratings agencies have responded to the end of the credit cycle by downgrading companies in a relentless tango. With each downgrade, credit tightens just a bit more for these companies, causing additional risks and operational difficulties. As liquidity dries up for them, they slash investments and cut costs, which wipes out the hope for growth – the essential ingredient that kept the illusion alive.
In that vein, Standard & Poor’s reported that it downgraded 44 US junk-rated companies in March, while upgrading just 15. This comes on top of the 82 issuers it downgraded in February. In the first quarter, about 45% of S&P’s downgrades hit oil & gas companies. Not a surprise, given the state the industry is in. But 55% of the downgrades hit companies outside oil & gas!
Note that top among the reasons S&P cited for the March downgrades is “operating performance.” That includes the disappearing hope for growth:
- Operating performance, deteriorating or expected to deteriorate (17);
- Potential lack of liquidity or rising potential for default (15);
- Merger, acquisition, or asset sales (2).
So S&P sees a “Spike in Defaults” as the “hangover from years of lenient credit may become painful.”
But this gloomy outlook concerns only part of the business world: larger companies with debt securities that are rated by the ratings agencies.
That part of the world, after years of profligate borrowing from over-eager investors that the Fed had blinded with its monetary policies, is in trouble, though now Wall Street soothsayers are once again running around and beating the bushes, proclaiming that junk bonds are a great deal. And they have to, because without new money, the entire house of cards comes tumbling down.
But for the rest of the over-indebted American business world, the outlook may be even gloomier. These are the smaller companies that are not showing up in these statistics because they’re too small to issue bonds and aren’t rated by Moody’s, Fitch, and S&P. They’re struggling in a very tough environment marked by slack demand.
And bankruptcies have soared.
Total commercial bankruptcy filings by corporations of all sizes and other business entities in the first quarter jumped 24% from a year ago, to 9,208, according to American Bankruptcy Institute. Of that total, commercial chapter 11 filings rose 9% to 1,419. In March, it was even worse: total commercial bankruptcy filings jumped 25% year-over-year to 3,351.
“Distress in the energy and retail sectors is represented in the increasing total of business filings, and we are also seeing a rise in individual chapter 11 filings,” explained ABI Executive Director Samuel Gerdano.
This follows 22 quarters in a row of year-over-year declines in bankruptcies. Something is suddenly broken. Hope has gone out for these businesses; now they have to “turn to the financial relief of bankruptcy,” as Gerdano put it.
And this is just the beginning. The Fed’s easy-money policies made every credit sin possible by encouraging yield-starved investors and banks to take ever greater risks. But now the credit cycle has turned, not just for the large corporations with too much debt on their balance sheets that the ratings agencies report on, and that they reluctantly downgrade when it becomes inevitable, but particularly for the innumerable small and much more vulnerable businesses that are struggling with lousy demand.
In aggregate, these smaller companies are crucial to the US economy. They’re traditionally where much of the employment growth comes from. So this turn of events, as it is now starting to play out from here on forward, is going to leave some ugly skid marks on the economy, banks, and investors alike.
“A hostile landscape” – that’s what BlackRock CEO Larry Fink called the global situation, where investors “are facing tremendous uncertainty, fueled by slowing economic growth, technological disruption, and social and geopolitical instability. And there’s a culprit. Read… Negative & Low Interest Rates Eat into Consumer Spending at Worst Possible Time: BlackRock CEO Fink
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
” … they slash investments, and cut costs which wipes out the hope for growth ” Damn, that sums up American business strategy.
mismanagement,subpar produts that are overpriced and some private equity firm that only cares about the bottom line and not taking care of the customer all add up to a business eventually closing.how does closing stores keep a company afloat?it doesnt.it just means the beginning of the end
Waiting for the employment shoe to drop to give these mainstream “investors” religion…
Let’s see some actual job losses, among not just the ‘waitress and bartender’ crowd but among middle managers, highly-paid resource industry, government employees and technical/engineering types.
Governments rarely lay people off. They re-shuffle the alphabet soup of government agencies and transfer the people around.
Most failed government projects are given budget increases, because politicians stupidly buy into the phony excuse that ‘we didn’t have enough money to get the job done’ the first time around.
The corporate sector, on the other hand, is not bashful about layoffs. Those layoffs come in deluges as soon as the CEO’s bonus is threatened. Also, those layoffs are frequently concentrated in middle management, because that’s where the company can generate the greatest volume of cost reductions.
In fairness, governments do downsize when necessary. Through attrition. Usually by encouraging those who can retire to do so and leaving positions unfilled. In fact, so many government positions were lost in the early days of the Great Recession, many economists, including some objective ones, blamed anemic consumer demand on these job losses. In some areas when you add lost teacher jobs with other government jobs (federal, state, county and city) the losses were very noticeable.
Yea, but a fair number of those government jobs are useless (most of the VA, for example could/should be “outsourced’ to private medical care). Near term, of course losing those jobs impacts consumer demand, but long-term, this expense is a gross misallocation of capital.
We won’t even mention the pension costs.
@Chip Javert,
I’m guessing you didn’t serve our country in the military judging from you dismissive attitude. Maybe it just you being jealous that our veterans receive better care than can be found in the private sector. The VA Healthcare system, a true socialist single payer program. has consistently topped all other health care systems in America in every category for almost two decades now. Why would you push our veterans that fought for our countries freedom into a lesser health care system? Are you just being a jerk or do you really believe our veterans should be shunted to the side once they’ve given their all and have little or nothing left to give?
So the only “real” jobs are for the well to do. I guess the people serving the rich by roofing their houses and providing other non derivative based skills just don’t matter.
Kredit,
Do not worry the reductions are in process. My firm has been doing it twice a year for the past five years. They are on schedule this along with outsourcing all our IT to India. Staff reductions are the only plans CEO’s have except increasing their bonus.
Unfortunate, but inevitable, given that the “fire-walls” and “sprinklers” which should have been re-installed after the last debacle in 2007/8, never were. For example, an updated/expanded Glass-Steagal, and reinvigorated SEC, CFTC and FTC, backed by RICO and a few “hanging” judges.
Boy am I glad I invested in these “pet rocks” some people keep talking about. You pile them up, but they don’t do anything!
“You pile them up, but they don’t do anything!”
All too true, but she likes shiny.
“The Fed’s easy-money policies made every credit sin possible”
Perverse incentives -> corrupt operations. So simple even a bankster can understand it, if can you get across the idea that “perverse” and “corrupt” really are bad things.
I still think loan-sharking should be criminalised, but hey, the sharks insisted.
To be sure, big ROI is better than little ROI, but little ROI is better than bankruptcy. Stability is a deeply underrated virtue.
Much, much more pain coming.
Over 70% of employment, is in small companies with less than 5 workers. This is the base foundation of the economy. These small companies are being squeezed by government from the top and by the poor economy from the bottom. They are breaking, as are their customer base, the main street consumer.
For them there has been no recovery. Only an ongoing slow slog through a stagnating, slow to no growth business environment. The worm (credit cycle) has now turned and Mr. Market is attempting to once again wash out the “dead wood” from the system. It was not allowed to in 2000 nor in 2008, making this current credit event epic. If allowed to occur.
Let the credit “Crash” begin in earnest. For too long extend and pretend has kept moribund companies alive long after they should have died.
A new generation of consumers in some ways smarter, in others rather clueless is reshaping retail, and wholesale markets.
Let the bank’s stock & bondholders eat this dirt, not the taxpayers of last resort, they’re tapped already. Then fire the incompetent bankers. they can always get a job in government. HA,ha,ha!!
Wait, maybe that empty retail space where they can set up their new & improved shadow banking operations. New day, new game.
Peabody, the worlds largest private sector coal company declares Chapter 11. Citigroup ponies up 800 million to keep it going.
http://sbj.net/Content/Archives/Archives/Article/Peabody-Energy-files-for-bankruptcy/48/108/104856
Perhaps we can repurpose the great John Prine song “Paradise” for Citigroup’s investment. “Mr. Peabody’s coal train has done hauled it away”. Never to be seen again.
if the economy had been allowed to run its course back in 2008 with the credit crunch numberous companies would have gone out of business and healthier companies would have been allowed to pick up the pieces .since that did not happen zombie companies were kept alive thru taxpayer money further crippling the economy in the long run.in my opinion all you have now is “get by”part time jobs with no hope of a recovery
There must be something between the Apocalypse of allowing a credit credit crisis such as occurred in 2007/8 to run to an immediate/complete conclusion [Lehman, GMC and AIG were just “samples”], driving the economy back to barter as occurred in 2001/2 in Argentina, and the currant unsustainable situation of vampire corporations on life support.
We have now wasted 7 years and enormous amounts of money, and have resolved nothing.
While it will never occur, what appears to be required is a “death panel” to evaluate all major corporations which have reported no/minimal profits or losses on their income tax returns, and place these in involuntary chapter 11 bankruptcy for reorganization/evaluation, and as may be determined into chapter 7 liquidation, with possible criminal/civil actions against the directors and officers, rationalized these are supposed to be for-profit businesses operating in a capitalist economy.
When the poster above mentioned government pension costs – – I am sure he was thinking about this, as I was :
The pension costs associated with the useless and redundant layers of government bureaucrats, such as the myriad layers of non-teaching administrators at state universities and colleges.
These are the people collecting HUGE and ETERNAL PENSIONS – – in states like Illinois and the State of California, and California’s many bankrupt counties.
Or a NYC pensioner – – taking huge overtime in the last few years of his “service” and retiring at age 50 with a $100K annual pension.
I am sure that person was not thinking about the deserving military veterans, as I was not thinking about them.
When BANKRUPT ILLINOIS and BANKRUPT CHICAGO finally swirl around the bowl and get totally flushed – – it will finally be evident to all onlookers that useless bureaucrat salaries and useless bureaucrat pensions were the breaking point.
One does not need to think of the Military at all to make this point.
SnowieGeorgie