At the worst possible time.
Most of the defaults, debt restructurings, and bankruptcies so far this year and last year were triggered when over-indebted cash-flow negative companies could not make interest payments on their debts.
During the crazy days of the peak of the credit bubble two years ago, they would have been able to borrow even more money at 8% or 9% and go on as if nothing happened. But those days are gone. Now the riskiest companies face interest costs of 20% or higher – if they’re able to get new money at all. Hence, the wave of debt restructurings and bankruptcies.
But that’s small fry. Now comes the wave of companies whose debts mature. They will have to borrow new money not only to fund their interest payments, cash-flow-negative operations, and capital expenditures, but also to pay off maturing debt.
That “refinancing cliff” is going to be the biggest, steepest ever, after the greatest credit bubble in US history when companies took on record amounts of debt, and it comes at the worst possible time, warned Moody’s in its annual report.
In its report a year ago, Moody’s had already warned that the refinancing cliff for junk-rated US companies over the next five years – at the time, from 2015 through 2019 – would hit $791 billion. Of that, $349 billion would mature in 2019, the largest amount ever to mature in a single year.
But Moody’s pointed out that “near term risk remains low as only $18 billion, or 2% of total speculative-grade issuance comes due in 2015.” And that’s how it played out last year.
Since then, the refinancing cliff has gotten a lot bigger, according to Moody’s new annual report. The amount in junk-rated debt to be refinanced over the next five years, from 2016 through 2020, has surged nearly 20% to a record of $947 billion.
This is an increasingly steep cliff, with the largest portions due in the later years of the period, including $400 billion to mature in 2020, the highest amount of rated debt ever to mature in one year.
And near term? Moody’s Senior Analyst Tiina Siilaberg warned that there would be “a significant wave of new issuance in late 2016 and 2017.” At the worst possible time – because “a range of macroeconomic factors will make it more difficult for lower-rated companies to tap the debt capital markets in order to refinance their debt obligations.”
One of those macroeconomic factors is the spread between yields of these lower-rated junk bonds and Treasuries, which has totally blown out. For debt rated CCC/Caa1 or lower, the average spread has shot to over 20%, where it had been on October 6, 2008, right after the post-Lehman panic. And yields for these bonds have soared to over 21% on average.
Among the other macroeconomic factors, Moody’s lists the slowdown in China and volatility in oil prices. And there’s another factor that will “make it more difficult for lower-rated companies to refinance”: worried regulators have been cracking down on banks’ exposure to leveraged loans, which are so risky that even the Fed has been fingering them publicly.
Banks sell these leveraged loans to loan mutual funds or repackage them into collateralized loan obligations (CLOs) which they then sell in tranches to institutional investors. When leveraged loans mature, companies have to come up with the money, but Moody’s warns that “rising defaults and the impact of the Dodd-Frank Act’s risk retention rule will make it more difficult for existing CLOs to supply corporate financing.”
This leaves Moody’s refinancing index, which measures if there’s sufficient liquidity in the credit markets to deal with the refinancing cliff, at “2009 levels,” which indicates “that the refinancing conditions are weaker than normal,” said Moody’s in its laconic manner.
And the refinancing cliff is getting bigger: In the current downgrade tango, companies at the lower levels of investment grade are getting downgraded one or two notches and end up with a junk credit rating, thus increasing the total amount of junk-rated debt that needs to be refinanced over the next five years beyond the $947 billion.
The telecommunications, technology, and media sectors are weighed down by the highest debt burden. But as energy companies and much of the remaining commodities sector have gotten run over by the commodities rout, their credit profiles have sharply deteriorated. And a number of these companies at the lower levels of investment-grade will likely be downgraded into junk.
For example, energy companies that Moody’s still rates Baa3, so one notch above junk, have $34 billion in debt maturing over the next five years. “But there is a high risk that investment-grade issuers in these sectors will be lowered to speculative-grade,” Moody’s said.
This trend has been playing out in Moody’s Liquidity Stress Index, where the energy sector continues to fuel liquidity downgrades and defaults. These companies are already grappling with cash flow constraints, and they will be tapping the markets just as increased regulation and slowing growth in China make the credit markets more risk-averse.
But it’s not limited to energy and commodities. Other companies in sectors like brick-and-mortar retail, restaurants, or telecommunications (Sprint is the biggie here) are heading down the same path toward the cliff. And when these companies can’t refinance their maturing debts, they go over the cliff – or rather their stockholders and creditors will go over the cliff.
So it’s not contained. Read… This is How Financial Chaos Begins
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Moody’s rated crap mbs’s AAA in 2005
Moody’s is always late. And it has all kinds of conflicts of interest. But when it FINALLY warns, belatedly, you better pay attention because by then, you’re already in the middle of it.
Who can believe what Moody’s has to say when you consider as an example; that Warren Buffet owns 12.32% of Moody’s. Please see Wikipedia the Free Encyclopedia: List of Assets Owned by Berkshire Hathaway. Question: Is Moody’s an independent rating agency?
I do question the depth of their analysis. For whatever reason, purposeful or incompetents, I find them less than credible. I’d look for cross referencing of their work from other sources. Although it seems unlikely they’d put out negative reports, but they may also be erring on the side of caution since they’re past history is so poor.
I hear so much “data “out there these days that seems contradictory…a lot of spin going on. If I don’t see it personally in my world, I’m very skeptical.
Ptb – Mark Twain said, “Trust everybody, and cut the deck.”
Twain also said, “I’m far more interested in the return of my capital, than in the return on my capital.”
FREE EGAN JONES————————————-
Sounds as if the Fed has two options: accept bankruptcies or introduce QE4 and start buying junk bonds.
The Fed will buy this stuff up. Not saying it’s right. Not saying it won’t come with a cost. They know that too, I suspect.
Well, here goes. . .First to engage in a little chest beating [like Bill Bonner has been doing all over the tv lately]: Back in 2004 – 2008 or so, I was making the analysis that JPMorganChase was doing a merger like clockwork every 3 years so as to avoid an audit by the SEC or OCC (or whomever) as they give a 3 year grace period after a merger or acquisition, and had been doing so since about 1995, (in my estimation) so as to be the ‘last bank standing’ after suckering all the other banks into writing too many derivative contracts and becoming technically insolvent, after which JPM would then gracefully take them over, and cross swap all the derivative contracts they would now control by owning both sides of the contracts by owning both of the counterparties to the contracts, they could simply tear up the contracts thru cross-swapping. (check JPM’s trail of acquisitions since it was only Morgan back in 1991) OK, so JPM did acquire about 60%+ of the US derivatives exposure back then, about $93 Trillion, and has by cross-ripping their doubly owned derivatives whittled it down to about $53 Trillion of exposure now. Like in the game of Hearts, if you can get all the hearts and the queen of spades you ‘win’ ! If JPM could get all the big banks, and all the derivatives in the market, they would ‘win’ and be the last big bank standing and ‘own the system’ ! and simply tear up all the derivative contracts that enabled them by subtle stealth, ploy and inveiglement to ‘take over’ all of their competition. Big gamble. But maybe due to my blowing the whistle on them back then they didn’t make it because somebody big got wind of their game before they could pull it off and be the New World Order’s ‘Bank of the World’. (Perhaps this is why Deutchebank is now the world’s biggest derivatives holder ! They are trying to Shoot the Moon ! and front-run JPM to the Brass Ring of world banking Domination and Power.)
Fast forward to today and tomorrow. . . As we are now fast approaching the ‘Refinancing Cliff’ as you so aptly termed it Wolf; can it be that all of this was being structured on purpose, so as to allow the biggest banks to ‘foreclose’ on ‘everything’ ! and instead of using derivatives to ‘crash the system’ and take over all their other big bank competitors, their new plan is to make everyone else go bankrupt, and then foreclose on them, in order to ‘own the system’ ?
Especially when you realize the loans they issued were based on key-board entries, not anything of value. Nothing. They issued Trillions in concepts called “Euro” or “Dollar”.
Just what is a “Euro”? Nothing. A word. A fantasy. A meaningless noun.
BUT, those who borrowed these “nothings” are required to pay them back (even though the issuing bank made them up out of nothing) and if the borrowers don’t pay back “real” Euros, then the bank takes their land, buildings, inventory, patents, etc.
In other words, the bank fooled the borrowers by giving them absolutely nothing but the borrower has to give the bank real stuff.
What an awesome trick Paul Warburg dreamed up there on Jeckyl Island, GA.
I have always been amazed at how the “investors” have been groomed to believe that mergers are a good thing. Mergers accomplish many things, mostly thru repricing and various other accounting tricks. Buying growth, converting real equity to debt, and getting the auditors off your trail being some of the most obvious. Your analysis of JPM is brilliant.
Thanks Lars. Even if you are completely from outer space, that is original thinking as far as anything I have read – it holds water at first blush – and I am fairly well read albeit a non-professional in the industry.
I have long had intuition nag me about the sheer number in derivatives. Going to chew on this line of thinking for a while.
Please post your thoughts more often.
This is what I believe as well. To add, I believe the insiders will become the new owners while even JPM shareholders will be wiped out along with everyone else.
The greatest bank robbery and transfer of wealth in the history of man is the inside job.
The federal reserve and federal government will do ANYTHING they can whatsoever to keep the system going at this point. Negative interest rate talks are a sure sign of desperation. The fed will buy up any and all junk bonds to keep hundreds or possibly thousands of companies from going bankrupt. If the system fails, billions will perish. The federal government knows this, and will throw the entire kitchen sink at the problem to avoid the inevitable catastrophe.
YUP. Lot of spinning plates in the air. Something might break.
Excellent comment Jason. The Fed is the deep state, completely out of control.
Watching the Fed is like observing someone who has stolen millions and has nearly lost it all at the craps table. Now it goes completely reckless doubling up trying to recover the losses (credit growth in Federalsleez) and hopes luck will let them not be found out. Now we start to resort to negative interest rates but won’t let depositors take their cash OUT of banks because when that gappens it is game over. Watch for early signs of trying to make gold illegal.
Only the US citizen can get accountability back over the Fed, if they fail, the world is in the most serious trouble ever.
A bank planning to deliberately screw other banks? I’m shocked!
Ratings agencies are a joke. I don’t believe anything given the environment we’ve been in for some time now and the creative accounting methods used. As I’ve said before: there is NO market. It’s all a load of baloney.
I’ve worked for companies who played the M&A game; the accounting done there is also an exercise in science fiction. You can choose your own metaphor, but it essentially a way to keep ‘all the birds from landing on the same branch at the same time’.