Comments on: Could Junk Bond Defaults Reach 20%?

By: Anonymous

Anonymous — Fri, 31 Oct 2008 19:45:00 +0000

Following up from my previous @ 3:41 PM, FT in December 2007 made the covenant-lite argument for why default rates could appear artificially low for a while and then jump dramatically.

By: Anonymous

Anonymous — Fri, 31 Oct 2008 19:41:00 +0000

The traditional 30% recovery rate cited by Accrued Interest probably won’t apply this time, because of all the covenant-lite debt this time around. Rather than being forced into bankruptcy workouts earlier in order to ensure at least some recovery for creditors, companies will keep going until the last possible moment and then abruptly go bust with nothing left to recover.

Then again, that might be too pessimistic. Maybe only investment-grade debt was covenant-lite, with stricter standards for junk? How loose did things get in the go-go years?

By: FairEconomist

FairEconomist — Fri, 31 Oct 2008 17:15:00 +0000

Given the magnitude of the event we’re looking at, passing the 90’s peak seems inevitable. I expect to pass the 1933 peak, because there’s been much more junk lending in the past 20 years. Although I don’t expect the downturn to be as bad as the Great Depression, I think higher credit risk in junk bonds will produce an even higher default rate. Certainly the market prediction of 15% default rates or so is very reasonable.

By: Ryan Barnes

Ryan Barnes — Fri, 31 Oct 2008 16:28:00 +0000

Nobody can know for sure what the CDS liabilities are for a particular “credit event”, but these represent a bigger risk to the system than and junk bonds themselves. Look at how much bigger the notional value of Lehman CDSs were; $360B net, ten times the largest market cap LEH ever got.

EpiphanyOne

By: fresno dan

fresno dan — Fri, 31 Oct 2008 11:43:00 +0000

Not knowing the details of how CDS’s affect bonds, could it reach 220%???
Really, I am seriously asking the question. And anyone who answers – are you really sure?

By: Anonymous

Anonymous — Fri, 31 Oct 2008 11:41:00 +0000

Not really knowing the details of CDS, could it reach 220%????
No, really, I’m serious. And anybody who answers – do you really know?

By: evilHenryPaulson

evilHenryPaulson — Fri, 31 Oct 2008 07:07:00 +0000

Another side of this story would be corporate earnings.

If you look at the S&P500 going from annualized $96 operating EPS at peak, and facing what will be a very possible $60 for calendar 2009 (I would argue its beyond likely)

I realize that financials have gone from 8 to 46% of those earnings inside of the last 20 years, but I think we'll see business earnings fall broadly. There won't be $800mn in quarterly HELOC withdrawals again any time soon. Wait for January until many realize how badly their business conditions are.

Autos are a very important, but I worry about retail and general small business. Great post up on CalculatedRisk connecting unemployment and CRE vacancy rates -- look for that vacancy rate to hit 20% if U3 goes to 8%