Corporate Default Rate Jumps Past Lehman Moment

And then there’s S&P’s “pessimistic scenario.”

The US corporate default rate, according to Standard & Poor’s Global Fixed Income Research, soared from 2.8% in January to 3.3% in February, a big jump for just one month, and the highest rate since December 2010, when it was recovering from the Financial Crisis, with QE and ZIRP running at full bore, and with banks and big corporations getting bailed out by the Fed and the Treasury.

And it’s higher than it had been during the early phase of the Financial Crisis in September 2008, when Lehman Brothers filed for bankruptcy, when all heck was breaking lose, when stocks and bonds were plunging, and when the default rate was “only” 2.96%.

But this time it’s different, they reassure us. In December 2007, the default rate was 1.02%. At the time, banks were already cracking at the seams. Bear Stearns would soon pop. The Financial Crisis was visible on the horizon. And the economy entered what would later be called the Great Recession. By November 2009, nearly two years later, the default rate peaked at 12%.

These aren’t overnight fireworks. This isn’t binary options trading. Credits take their time to react.

But then newly created money surged through the system. What followed was the greatest credit bubble in US history. By July 2014, the default rate had dropped to 1.4%. That was the peak of the Fed’s fanciful handiwork that had “saved” the economy, an era when even the riskiest borrowers could get new money to fill their financial sinkholes, when bankruptcies had become rare, when the business cycle had been abolished, and before the price of oil fell off the cliff.

Then it all came unglued again. And in February, S&P’s US trailing-12-month speculative-grade corporate default rate finally accomplished the feat and jumped above the rate of the Lehman-moment:


Rather than letting the enormous and increasingly onerous pile of corporate debt blow up and get restructured, at the expense of bondholders and stockholders, the Fed, in its infinite wisdom, made sure that this debt, plus even more new debt, would get carried forward to burden companies and the economy overall for years to come. Hence the lousy recovery.

And it’s going to get worse. Standard & Poor’s expects the default rate to rise to 3.9% by December 2016, up from 2.8% in December 2015, and 1.6% in December 2014, as it reported in February:

Stressors in the form of persistently low oil prices, the beginning of tighter monetary policy by the Federal Reserve for the first time in nine years, and slowing global growth likely will produce more defaults in the next 12 months.

In its “pessimistic scenario” — “if global economic and financial headwinds continue on their present course” — the default rate could jump to 5.2%. That would match the rate in February 2009 when it was on the way to 12%.

What pushed the default rate up in February were 11 defaults by S&P-rated companies, seven in the energy sector, two in the financial sector, one in the leisure/media sector, and one in the high tech/office equipment sector. These are the desperate debt sinners of the month:

  • Constellation Enterprises
  • SFX Entertainment
  • Sheridan Investment Partners I LLC
  • Sheridan Investment Partners II L.P.
  • Comstock Resources
  • Noranda Aluminum Holding
  • A.M. Castle & Co.
  • Paragon Offshore
  • Energy XXI
  • Denver Parent Corp.
  • PetroQuest Energy.

Credit agencies are trying, belatedly as always, to catch up with reality. And now downgrades are hailing down on Corporate America: In February, S&P upgraded only 20 companies with $103 billion in debt, but downgraded over five times as many, 110 companies, with $399 billion in debt.

The resulting downgrade ratio of 5.5 to 1 compares to a downgrade ratio of 2.2 to 1 for 2015, and of 1 to 1 for 2014 during the peak of the credit bubble.

And the spread in yields between corporate bonds over US Treasuries widened further in February. Spreads of junk bonds rated CCC or lower rose from 18.6 percentage points at the end of January to 20.7 percentage points in mid-February, before settling at 19.8 percentage points at the end of February!

These companies are, for all practical purposes, excluded from the capital markets. When they need more money and cannot raise it, they might have to default on their existing debts. Hence the soaring default rate.

The collapse of lower-rated junk bonds is now having nasty “spillover effects,” as S&P called them, on higher-rated junk bonds and even on investment-grade bonds, whose yield spreads widened to 868 and 254 basis points respectively (8.68 and 2.54 percentage points).

As the bond market comes unglued from the bottom up while contagion spreads far and wide, stocks are going to have a rough time, regardless of whatever thrilling rallies appear out of the fog. The basic reality is this: When a company gets in credit trouble, stockholders, who are at the bottom of the capital structure, are the first to feel the pain; and when it defaults, stockholders often get completely wiped out.

And so “distress” in bonds has spiraled into Financial Crisis conditions. Read… Now It’s Even Worse Than it Was When Lehman Collapsed, But It’s “Contained”

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  44 comments for “Corporate Default Rate Jumps Past Lehman Moment

  1. Jonathan says:

    Market gonna still gonna rally because good news = good news and bad news = more STIMULUS which is = good news.

    • Brett says:

      More Stimulus is resulting in less and less of a reaction, the day will come when stimulus will be seen as Bad news period.

      • Bob Miller says:

        You’ve been reading those Marvel Comic books again. Over 500 in two days isn’t less and less. I just love it when someone says, “These crooks are going to get theirs.” And “These fools are going to be sorry.” I have news for you, these crooks have been getting theirs now for 7 years and they’re still getting theirs and yours. And if any of them are feeling sorry, it’s because they went to Wall Street in a car instead of a truck.

        It’s like the old joke. “John, go get a shovel. There’s gold out here just laying on top of the ground.” John answers for all of Main Street USA, “Are you out of your mind, Bill? You know what they want for a shovel these days?”

        I asked a group yesterday who was whining about these bankers, “Who in this room has run for a political office? Who in this room has pulled themselves away from ESPN and volunteered to help get a politician elected? Who in this room has served on a battlefield? Who in this room has gone to a VA hospital and volunteered?” None of these sixty-five financial gurus that knew what was wrong and how to fix it raised their hand. There was one person who didn’t have the answers that raised his hand. That person was me. One guy did say he had worked hard and taken care of his family. To which I replied, “So do rats, monkeys and elephants. Most insects do that for their family as well.”

        • Dan Romig says:

          Four years ago, I (along with many other people) got signatures to have Libertarian Gary Johnson’s name put on Minnesota’s Presidential ballot. Does that count?

          If you vote(d) for either the Dems or GOP, you are the reason our nation is in the sorry state it’s in.

        • Bob Miller says:

          Dan, I chose capitalism over paganism. But at least you did something.

        • Dan Romig says:

          Bob, I should have clarified my final comment. The ‘you’ for voting was not specific to you, but a generalization.

          I may be wrong, but Libertarianism is the embodiment of capitalism. And for what it’s worth, I have had my own business since I was 14 years old that’s still going 40 years later. Plus, from 1993 to 2010, I worked with my father in a family business which we sold to Limagrain Seed Company.

          I do enjoy reading your comments sir.

        • Bob Miller says:

          We’re not at odds on Libertarianism or anything else you have said. You just left yourself open, and being opportunistic, I took advantage of it. I do not fault the people who post on this site for being totally disgusted with the status quo. It is truly sickening. With 300 million Americans on tap and we’ll end up with a choice between Mr. Trump and Mrs. Clinton. That like a bartender asking, “What will it be buddy, a shot of Ebola or HIV?”

    • Mark says:

      “The Vision” by David Wilkerson, published 1973.
      Book every body should read.

    • Janus shole says:

      As long as the federal reserve can force Oil sales to be only in the US Dollar, the federal reserve can print as much paper Currency as it needs to buy the US Debt in the form of treasury bonds. However, as the US National Debt rises to ” impossible to repay ” levels; Nations holding the Dollar will start to get rid of them by, buying precious Metals and all these Dollars will be returning to the US which, could start inflation. If the 2008 collapse happens again, this time there will be no bailout as there is nothing left but empty paper promises and, the World won’t buy it this time.

      • Bigfoot says:

        Indeed, the implementation of the petro-dollar ‘scheme’ in the early 70’s was an absolute brilliant way for the people running things to take control & guarantee the dollar had a long run as the worlds reserve currency. Also, they had SA & other OPEC countries maintain their reserves in treasuries.

        Do a search for world reserve currencies & their timeline/longevity. They come & go often through the course of recorded history. As far as the impossible to pay debt load, I believe we passed that mark long ago & a debt based currency unit can never be repaid anyway. Thing is, the majority of the rest of the world is paddling down the same ‘Debt River’, starting to encounter the rapids, & trying to figure out whether to zig or zag to elude the waterfall. To get rid of their dollars, they must of course be exchanged for something else. I know there are many that believe it will be precious metals. I think a reasonable case can be made that they will play a role.

        I believe we will see a reversal (already started IMO) of the petro-dollar scheme & many of those treasuries will end up being exchanged for energy. As far as the shakeout, I’m way to dumb to offer up anything viable. Way too many variables. I do expect the impact will be quite negative for the majority of us so I plan accordingly for a variety of situations.

        • MG says:

          Until there is anything even close to rival the depth and breadth of the us treasury market, the prominence of the dollar will continue. Petro dollar is integral part of the dollar being the major reserve currency, however it certainly is not a game changer.

  2. TexasReal says:

    Now, now… settle down… don’t worry… Warren Buffett says all is GREAT!

    “Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth.”

    “For 240 years it’s been a terrible mistake to bet against America…America’s kids will live far better than their parents did.”

  3. Álvaro says:

    It’s oh so contained, baby. Keep containing it, you know how I like it.

    • Jonathan says:

      It’s always “contained” and “under control” except when shit hits the fan it will be called “unexpected volatility”. I think we can find better predictions about the economy from a random fortune teller booth.

      Now I have no idea how this is going to play out but the nightmare scenario is actually not a sharp recession because that would actually mean clearing out all the massive malinvestments everywhere, but a very gradual decline with brief spikes that has no end in sight like a terminal cancer patient pumped full of drugs that is going to die no matter what.

      • Álvaro says:

        Hitler said Russian front was contained.

        Constantine said Ottoman empire was contained.

        Praetor Gaius Claudius Glaber said Spartacus revolt was contained.

        Publius Cornelius Scipio said Hannibal army was contained.

        Soviet Union said Chernobyl was contained.

        Everything is contained until it isn’t.

  4. night-train says:

    Well, as long as it is different this time.

  5. Yoshua says:

    It is different this time. Trust me, I know nothing about economy. But I understand one thing: without energy there is no economy.

    The last time global crude production peaked and the oil price spiked at $150 p/b and the economy collapsed since it could not grow anymore.

    This time the U.S market is flooded with cheap abundant shale gas and now the global economy will have to adjust to this fact.

    How will it play out ? I haven’t got a clue.

    • JR says:

      Bush said the middle east was contained (“mission accomplished.”)

    • West says:

      Oil is not the reason the economy collapsed last time, and it won’t be the reason it collapses this time. Excessive credit, mispriced risk, and the resulting speculation caused the last three collapses (2001, 2008, 2016?), which oil and terrorism is a convenient cover story, the root cause is the same.

    • JuanDonJuan says:

      Cheap, abundant shale gas/oil? I’d agree, with the caveat that until this re pricing cycle is over, and we can see the balance sheets with a true cash flow positive cost basis.
      Until then, my guess is that everybody has to keep making the payments to keep the credit markets happy. Hundreds of billions invested/borrowed, when does the principal get paid back, not just the coupons?

  6. Dan Romig says:

    Wolf, there’s not a better analysis of how we got to where we are today than you’ve summarized in this sentence:

    “Rather than letting the enormous and increasingly onerous pile of corporate debt blow up and get restructured, at the expense of bondholders and stockholders, the Fed, in its infinite wisdom, made sure that this debt, plus even more new debt, would get carried forward to burden companies and the economy overall for years to come.”

    So the Fed did not let free market forces work to cull those that were dying, as they damn well should have. Instead, they kicked the can down the road and lined the pockets of Wall Street’s big five with QE and TARP. This has furthered income inequality, kept the economy in stall speed, kept the labor force in the US working for low wages (Starbucks coffee servers get paid too, you know), kept the CEOs and members of the Board of Directors fat from bonuses due to financial engineering, and set up a US default rate that’s about to explode!

    Well thank you very much helicopter Benny.

    This nation is enslaved to Wall Street, and it’s not going to end soon. Obama replaced Holder with Lynch, and I assume readers know what she did under Geithner from ’03 to ’05. HRC, who won big last night and speaks well (as did other world leaders who where nefarious), is part and parcel of the banksters. The GOP is no different, and if Trump gets into the White House will he reign in the Fed and Wall Street?

    This here citizen will be voting Libertarian. Readers?

  7. ERG says:

    I believe the word we’re looking for is ‘deleveraging’.

    It’s a word many persons in economics no longer remember, especially if they work in the Eccles Building.

  8. Mike R says:

    People call for a ‘healthy deleveraging’. In a more normal debt cycle, yes that makes sense. The monster that has been created will take the entire system down if deleveraging is allowed go full bore.

    That is why the Fed/Central Banks printed after 08/09. That is why they will print again (in some form/fashion) as things deteriorate once more.

    Their approach puts off for tomorrow (hopefully many tomorrows) the collapse that would happen today if markets were allowed to operate on their own.

    I don’t know how long this will go on. But it will until something breaks and the trillions of printed fiat decide to find a more honest home.

  9. LG says:

    This country was built with the blood and sweat of the slaves!

    And the banking system was built with the paychecks and savings of those slaves!

    This will never change!

    Act accordingly.

  10. Ptb says:

    The system is entirely dependent on debt and thus the debt will be maintained. At any cost.

  11. Chicken says:

    Sixteen consecutive monthly rate hikes should put a lot of money into insiders pockets.

    Wealth confiscation cycle I see goes like this: Load everyone up on a mountain of debt and pull the rug out from under them at their weakest moment.

    This setup is a near perfect rinse and repeat.

    For those who cannot believe they won’t repeat this lucrative scam and the FED isn’t on the take, I wish them best of luck b/c that’s what they’ll need and plenty of it IMO.

  12. NOTaREALmerican says:

    But, don’t forget: debt that can be rolled over is really an asset.

    • Wolf Richter says:

      Where did you study accounting? They didn’t teach this sort of thing where I went to school. Too bad. Converting a liability into an asset would certainly be a good thing, and not unheard of. Like converting losses into income.

      • Chicken says:

        Right up until you hit a brick wall while driving your Chevy Tahoe.

      • Ham says:

        I’ve read in business texts that a company’s capital structure should not play a large role in its valuation.

        Not saying I believe that, but it seems to be for the purpose of instilling a type of though process wherein, cash flow is god and debt almost irrelevent – because the executives still keep getting paid if cash is still flowing.

        I’m surprised no story on Sports Authority.

        • Wolf Richter says:

          Story on Sports Authority is posted :-]

          BTW, debt never matters, until it does. Companies go bankrupt because of debt and for no other reason. They owe money, and they can’t pay. Game over.

  13. NotSoSure says:

    It is different this time, because the Fed will eventually just buy the entire market outright i.e. everyone will eventually work for the Fed or the Feds. The market is just front running the eventual outcome.

  14. Tim says:

    As far as I know, commercial paper market, and C & I loans are not seizing up yet. Credit freeze will probably spread there.

  15. Chicken says:

    “Rather than letting the enormous and increasingly onerous pile of corporate debt blow up and get restructured, at the expense of bondholders and stockholders, the Fed, in its infinite wisdom, made sure that this debt, plus even more new debt, would get carried forward to burden companies and the economy overall for years to come.”

    Yes, and on the plus side this green Earth-friendly policy will dramatically slow global warming.

    Has everyone forgotten the parting words muttered by their high school economics teacher as they were walking out the door on the way to College?

  16. Nope says:

    It doesn’t matter what the data says, the markets will continue to climb. If you believe the market has been manipulated for the past 7 years, then no reason to think it can’t continue to be manipulated. We’re going to hit new highs before the year is over or at least be in the positive for the year.

    • MC says:

      While I generally agree with the sentiment, and I am ready to bet direct equity purchases wouldn’t be off the table as a last resort, the problem is what we’ve seen in the past year or so is a phenomenon called narrowing, meaning, yes stock markets climb, but they are pushed forward by a handful of megacaps. Take the rest and you are getting nowhere at best and losing monet at worst.

      While gaining 5% on a given stock is always great, what investors really want is the new Amazon, meaning a triple digit return on the IPO.
      Hell, before the Shenzhen Small Caps cratered in June 2015, four digit returns on an IPO in a few weeks weren’t unheard of!

      To this it must be added companies now struggling selling their bonds at reasonable yields have taken issuing mountains of equities to raise some quick capital. In just two months almost $10 billion in new equities were issued by distressed shale operators such as Pioneer and Devon. This is called “dilutive equities”, meaning as the number goes up, value goes down because of increased supply. The very definition of pushing on a string.
      These new equities were pushed on the market around the time everybody was already uncorking the champagne about the OPEC production freeze and dreaming about $150/bbl oil in a matter of months.
      Then came the Iranian and Iraqi “niet”. Then came record production figures from Russia. Then yet another record buildup at Cushing.
      Oil stalled.
      Right now we are seeing a “forced rally”, meaning an attempt to send the price up in face of unchanged fundamentals through sheer speculation which is helping shift those dilutive equities.
      This is extremely dangerous as, if fundamentals do not change very soon, oil will crash again and probably go even lower than last time around. Nobody loses friends faster than oversupplied commodity.

  17. Julian the Apostate says:

    Yes Virginia, there is a Santa Claus.

  18. David says:

    At some point in the not to distant future the music will stop. Why? Because all bubbles pop. This isn’t the last financial crisi spurred by the U.S. subprime mortgage meltdown. This is a global debt time bomb created my massive money printing and now on to more creative finacial engineering like NIRP. CB’s are desperate, getting more desperate by the day and determined to keep the general public comfortably numb to the fact that everything is ok and only getting better from here. Wow, forget the helicopter money. I need some of those CoCo puff bonds Douche Bank is handing out these days.

    The global economy has now become a giant Black Hole where nothing is real. The only thing real are the real phony and crooked politicians running for President. All a bunch of lying, deceitful, distrustful and corrupt hucksters. The current guy promised Change for the positive and that turned out to be just another in a long line of hypocracies. Will a real leader like JFK or MLK please step to the front of the line?

    • Bigfoot says:

      You mean a leader like JFK that did this?

      I don’t generally use Wikipedia for a link but it’s hard to find one on this topic (money) that doesn’t have a lot of ‘agenda’ associated with it. The history of money along with the central banks of the US since the revolution is quite interesting. Knowledge of our current & past setup is imperative & generally answers a lot of ‘why’ questions that people may have. It did for me.

      So many seem to focus on their local economy/market/etc. which I suppose is a natural thing. I’m right there with ya David, looking at the entire global finance/money/debt/banking show & pondering the ramifications of the coming implosion. I smell a complete global financial reset coming that I believe will take years to play out. Will we have a worldwide debt jubilee or will a few large entities end up with most of the marbles?

      I don’t believe this countries problems will be solved at the voting booth. Stand up, speak the truth in an eloquent manner & make a difference, right? Get involved in a political campaign, right? I have first hand experience of how you can be smacked down for trying to make a difference. I’ll be glad to detail one of these experiences for anyone who’s curious. Oh, & the current guy is just a puppet like most that came before him. Pay no attention to the group behind the curtain, just cheer for your guy/gal. Meanwhile, ‘they’ have a suit for each one of us that says ‘will work for food’. Realizing this, I’ve increased the size of my garden this year :)

    • miles dudley says:

      I want some of them CoCo puff bonds Douche Bank is handing out too

  19. JuanDonJuan says:

    Fellas, I think we’re gonna need a bigger TARP

  20. Mad Max says:

    The folly of a centrally planned economy… Thats all ‘accommodative’ policy is in the end. A belief by bureaucrats that they can do a better job pricing and managing risk than the free market.

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