The “credit cycle” begins to unravel.
One of the big indicators of the end of the “credit cycle” is the number of bankruptcies. During good times, so earlier in the credit cycle, companies borrow money. Then, overconfident and lured by low interest rates and overoptimistic rosy-scenario rhetoric emanating from all sides, they do what the Fed and Wall-Street firms want them to do: they borrow even more money. Then reality sets in, and they buckle under this pile of debt.
The bankruptcy filings of Ultra Petroleum and Midstates Petroleum on Friday and Saturday brought oil & gas bankruptcies of companies rated by Fitch and other ratings agencies to 59. These two companies piled $3.1 billion in defaulted junk bonds and another $1.5 billion in defaulted loans on top of the growing mountain of defaulted oil & gas debt.
With these two bankruptcies, Fitch Ratings raised its high-yield energy default rate to an all-time record of 13% and now projects that by the end of 2016, this default rate will jump to an even more glorious record of 20%.
But it’s not just oil and gas. And it’s not just companies whose bonds and loans are traded and are rated by Fitch and other ratings agencies. These are the larger outfits – big enough to have bondholders and big enough for the financial media to report.
But bankruptcies of all kinds and sizes and in a wide variety of sectors are now soaring.
Total US commercial bankruptcy filings in April rose 3% from March and soared 32% from a year ago, to 3,482, the American Bankruptcy Institute just reported. It was the sixth month in a row of year-over-year increases.
Of these commercial bankruptcies in April, 680 were Chapter 11 filings, up 67% year-over-year! The rest were liquidations. And the pace is quickening: In just one month, from 450 in March, Chapter 11 filings have skyrocketed 51%!
The ABI pointed at distress in a “number of sectors, including energy and retail.”
The broadening scope of this wave of bankruptcies is a strong indicator that the credit cycle has ended, that the credit bubble created by the Fed to reflate the collapsed prior credit bubble is now also deflating. But this time, the Fed, after incessantly flipflopping, still has interest rates pegged at near zero.
Furthermore, bigger US companies can issue bonds at crazy-low yields in Europe were yield-starved investors, driven to insanity by the ECB’s negative interest rate policies, are eager to buy our “reverse Yankee” landmines. In addition – and this takes the cake – bonds issued by US companies with entities in Europe are even eligible for the ECB’s corporate QE bond-buying program. Rarely, according to my memory, has Europe been this stupid.
It means that big US companies with a halfway decent credit rating and a business model that the market perceives as functional still have access to plenty of easy and cheap credit.
But smaller companies, including tiny operations with one or two folks breaking their backs trying to make something work, don’t have these options.
When they face operational challenges and too much debt, the bell is ringing. Just when they need the money the most because they’re bleeding and blew through their equity and have nothing left to leverage and all the collateral has been pledged, they’re cut off as lenders try to limit the damage. And that pushes them into bankruptcy.
At the end of the credit cycle, the excess debt that was piled on during the heyday goes bad and needs to be restructured. Creditors are coming to grips with losses. Banks are writing down their loans. Bondholders take their licks. Equity holders often lose everything. And this is just the beginning.
Another day, another bankruptcy of a brick-and-mortar retailer. They’re in a very tough business. They’re besieged by online competition and other desperate brick-and-mortar retailers. They have big expenses. And they face strung-out American consumers. Throw a lot of debt into the mix, and it can turn toxic in a minute. Read… This is Why No One Should Bail Out the “Smart Money” Stuck in Brick-and-Mortar Retailers: Let them Shed their Own Tears
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.