Jump to content

Fucking Zombies, man!


bernorange

Recommended Posts

From Nomi Prins:

Quote

...
In its recent quarterly report, the BIS warned that low rates have catalyzed an increase in the number of “zombie” firms. The number of such firms has now risen to an all-time high.

Zombie firms are companies “that are at least 10 years old, yet are unable to cover their debt service costs from profits.” Their prospects for future growth aren’t so hot either.

According to the BIS, these zombies are still piling on debt and sucking money out of the real economy. Zombies “took on more debt and disposed of fewer assets after 2000.” This behavior accelerated after the financial crisis because of low interest rates.

The problem is that once a company becomes a “zombie” it tends to stay a zombie. That phenomenon is only getting worse. The BIS disclosed that “whereas in the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016.”

Zombies created from an influx of central bank money aren’t good long-term investments. It’s one thing for a company to take on debt to grow, but it is another to take on debt simply to re-pay other debt.

When the debt bomb finally detonates, it’s the rest of us who will suffer. Because of the collusion that’s gone on and continues to go on among the world’s main central banks, that problem is now an international one.
...

More:  https://dailyreckoning.com/worlds-most-important-bank-issues-urgent-zombie-alert/

Link to comment
Share on other sites

Since this topic has generated so much interest, I thought a follow up might be in order:

Quote

...

After 35 years in the making, the bond bubble would be the biggest ever. Companies, governments and even mortgages via securitisation are all financing themselves via bonds.

The trouble is, interest rates can’t really go much lower. They can go higher though. And that spells trouble in bond markets and elsewhere.

The Australian Financial Review (AFR) reported on what the consequences look like in Australia in terms you can understand:

Quote

PIMCO warns that rising mortgage costs will increase mortgage payments from 38 per cent of pre-tax income to close to 48 per cent, near its worst level over the past two decades.

Interest rate shocks are a shocker, as Aussies might say.

Further AFR articles have the headlines “Developers squeal over apartment price slump” and “6700 apartment projects blacklisted for loans”.

But it’s not just Australian debt markets that are tightening. Bloomberg reports “European Bond Market Falls Victim to Volatility as Third Sale in a Week Pulled”. An Austrian, a German and a Bahraini firm all pulled their bond sales.

Bond yields around the world spiked recently thanks to Italy, the Federal Reserve chairman saying he wants to hike rates much further, and the Bank of Japan winding down its stimulus.

If bonds are in a bubble, it may have just popped.

...

https://www.capitalandconflict.com/central-banks/zombies-bombs-and-vigilantes/

Quote

Canada’s economy is in the throes of a zombie outbreak and it’s threatening to devour the country’s productivity.

That, more or less, is the conclusion of a new report from Deloitte, which found that at least 16 per cent of publicly traded firms here could be classified as “zombies” — defined as mature firms more than 10 years old that lack sufficient revenue to cover interest payments on their debt.

...

https://montrealgazette.com/news/economy/deloitte-sounds-alarm-about-canadas-zombie-companies/wcm/e0a3b192-66bf-4308-9864-7b739c403604

Quote

Following Turkey’s failed coup attempt in July 2016, President Recep Tayyip Erdogan imposed a state of emergency, curtailing not only political but also economic freedoms, including a ban on corporate bankruptcies. When the Turkish government lifted the state of emergency two years later, it naturally led to fears of a bankruptcy surge. The Turkish lira’s meltdown in August, contributing to a 40 percent devaluation of the currency this year alone, has exacerbated such fears. Erdogan’s response has been to allow companies to exclude foreign currency losses from bankruptcy calculations, which risks creating a “zombie economy” to complement Turkey’s already lifeless democracy.

...

https://warontherocks.com/2018/10/turkeys-walking-dead-zombie-companies-lurk-around-every-corner/

The Fed wants to continue raising rates.  We live in interesting times.

  • Like 1
Link to comment
Share on other sites

  • 4 weeks later...

From the glass half empty department...:

Quote

BBB-rated bonds are just one notch above junk (also called high-yield).

Fallen angels are bonds that slip from BBB to junk.

...  during recessions. All the investment grade bond funds have to dump the fallen angels straight into illiquid markets with few takers.

Half of the corporate bond universe is BBB-rated.
...
When the junk bond market does blow, it is nearly guaranteed to take equities with it. That's the scary thing about the recent equity selloff.

The junk bond market selloff has barely started and so has the accompanying stock market decline.

https://moneymaven.io/mishtalk/economics/junk-bond-bubble-in-six-images-fDFpyyHRZkKjik2eqMocnQ/

 

Link to comment
Share on other sites

  • 1 month later...
Quote

The pillars of the global financial system are fundamentally unstable and could lead to a frightening chain-reaction in the next crisis, the world's top watchdog has warned.

Giant "central counterparties" (CCPs) that clear much of the $540 trillion (L428 trillion) nexus of derivatives are themselves vulnerable to failure in times of extreme stress.

This is a worry looming ever larger as rising US interest rates expose the weak links in global debt markets.

The Bank for International Settlements said in its quarterly report that the CCPs could cause "a destabilising feedback loop, amplifying stress."

The implicit message is that well-meaning regulators may have made the financial architecture more dangerous by mistake.

...

Central banks are walking a tightrope as they try to extract themselves from a decade of emergency stimulus. Quantitative easing and ultra-low rates have lifted debt ratios to levels that are 40 basis points higher than the pre-Lehman peak, this time led by emerging markets. Nobody knows where the pain threshold lies for monetary tightening in such circumstances.

The BIS says the nature of the world’s business cycle has entirely changed over the last three decades. For most of the 20th century booms turned to bust when rising inflation forced authorities to jam on the brakes.

This is no longer the case. Globalization and the inclusion of China and emerging Asia in the trading system have suppressed inflation. What now brings the party to an end is excess credit and rising debt service ratios. As conditions tighten, the financial system eventually buckles under its own weight.

he thrust of BIS research is that we may be close to this inflexion point. Standard & Poor's says the number of junk bonds rated B minus or below has jumped from 17 to 25 percent over the last year. This is now the highest since global financial crisis.

The average yield on U.S. junk bonds has risen 165 basis points to 7.2 percent over the last year. A cascade of downgrades has begun. The spike has been even more dramatic in the eurozone where stress is nearing danger levels, leaving credit analysts baffled by the European Central Bank’s decision to halt quantitative easing this month.

The BIS fears a waterfall effect. "The bulge of BBB corporate debt, just above junk status, hovers like a dark cloud over investors. Should this debt be downgraded, if and when the economy weakened, it is bound to put substantial pressure on a market that is already quite illiquid," said Mr. Borio.

The volumes are sobering. The ratio of U.S. corporate debt to gross domestic product is 73.5 percent of GDP, higher than in 2008, although this is a children's playground compared to China. The share of leveraged loans in the U.S. with risky "covenant-lite" contracts has reached 80 percent this year.

The $1.3 trillion market for leveraged loans has become an increasing worry. Prices of this debt on the secondary market are breaking down. To clear the transaction in early December, JPMorgan slashed the price for an XOJET takeover loan to 93 cents on the dollar.

,,,

https://www.telegraph.co.uk/business/2018/12/16/bis-fears-financial-seizure-heart-worlds-clearing-system/

No paywall copy here:  http://gata.org/node/18694

The BIS has been really active with the doom and gloom lately.  I have mentioned on these boards (here, TOS) many times that the fundamental problems from the 2008 crisis were not solved - that we've only kicked the can down the road.  The BIS, IMF and Fed (and their agents) have all been sending up bat signals in the last month or so that shit could get real soon.

Link to comment
Share on other sites

  • 2 weeks later...
  • 2 weeks later...

This is from May, 2018:

Quote

With corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.

The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.

The "prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," Mariarosa Verde, Moody's senior credit officer, said in a report. "The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.

Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."
...
Lower-rated companies have managed to keep their defaults below the historical average even though their credit metrics are "deeply stretched," Verde added.

"This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default," she wrote. "These companies are poised to default when credit conditions eventually become more difficult."

https://www.cnbc.com/2018/05/25/moodys-warns-of-particularly-large-wave-of-junk-bond-defaults.html

Rickards claims that a wave of corporate junk bond defaults is likely to be the catalyst for the next great financial crisis:

Quote

...
The danger is that when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.
...
If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be at least six times larger than the subprime losses in 2007-08.
...

https://dailyreckoning.com/heres-where-the-next-crisis-starts/

Link to comment
Share on other sites

Quote

Industrial output is in crashing. Retail sales have stagnated. Business confidence has dropped, and investment is heading south. ... It is now painfully obvious that the eurozone is heading into a sharp recession.

The numbers coming out of all its main economies, from Germany to France, Italy and Spain, are relentlessly bad. What does that mean? Far from winding up quantitative easing, the European Central Bank will be forced to step in with emergency measures to rescue a failing economy -- but it may well prove too little, too late.

2018 was meant to be the year when the eurozone consolidated its steady recovery, agreed on reforms to fix the flaws in the single currency, pressed forward with reforms to boost its competitiveness, and gave the rest of the world a lesson in balanced, sustainable growth. Over the past year, a ton of investors' money has bought into the Euro-boom story. Steady recovery would drive voters away from populist parties, encourage reform, and create a virtuous circle of expansion and renewal.

The script has not quite worked out as planned, however. Today bought yet another wave of disappointing numbers. Italian industrial production was down 2.6 percent year on year. In Spain, industrial output was also down 2.6 percent, the fastest rate of contraction since May 2013. The day before, we learned that French industrial output was down by 1.3 percent in November, and Germany, which is meant to be the main engine of the continent, recorded a decline 1.9 percent for the month, as well as re-calculating October's data to show a steeper drop than reported earlier.

The eurozone is now seeing a synchronised slowdown right across all its major economies. ...

https://www.telegraph.co.uk/business/2019/01/11/next-eurozone-crisis-has-already-started/

copy (no paywall):  http://gata.org/node/18758

Trade data indicates China's economy is nosediving:  https://moneymaven.io/mishtalk/economics/china-trade-data-is-nail-in-the-coffin-of-global-economy-UUKW-YtkGk-gOrFjGJ5ORw/

2019 looks like it's going to be serving up a shit sandwich to the world.

Link to comment
Share on other sites

  • 2 weeks later...
Quote

...
Since the global financial crisis, the business cycle has been suspended, and replaced by only a credit cycle. Credit, credit and more credit crowded out productivity and inflated asset prices while doing little for the real economy and driving the worst inequality in generations. The mis-pricing of money and credit has also driven a terrible misallocation of capital and kept unproductive zombie debtors alive for too long.
...

https://www.home.saxo/-/media/documents/quarterly-outlook/q1-full-report-2019.pdf

Link to comment
Share on other sites

  • 1 year later...

* bump *

Quote

... Fitch Ratings expects the number of institutional term loan defaults in April to top the record of 15 set in 2009, according to a new Fitch Ratings report.

"Fitch anticipates the default rate will exceed 3% in May, which would be the highest since March 2015," said Eric Rosenthal, Senior Director of Leveraged Finance. "The $7 billion of April default volume propelled the TTM default rate to 2.6% from 2.2% at March end."

The 14 defaults registered this month impacted 10 separate sectors, led by three in healthcare/pharmaceutical. At least another $3 billion is projected to occur this month, with Neiman Marcus Group Inc. and Akorn Inc. expected to default imminently.

Several large companies on our Top Loans of Concern missed corresponding bond interest payments earlier this month and are likely to file bankruptcy including Intelsat Investments, JC Penney, and Ultra Resources.

Neiman's and JC Penney's defaults would together lift the retail rate to 13% from the current 7% level. The default rate for retail is forecasted at 19% at year end, led by anticipated defaults for Serta Simmons Bedding, J Crew, Ascena Retail Group, and Jo-Ann Stores.

The energy TTM rate stands at 5.5%, but sizable expected defaults from Seadrill Partners, California Resources and Chesapeake Energy would push the rate to 18.0% by year end.

The telecommunications default rate reached 4.0% following Frontier Communications' bankruptcy and would rise above 7.5% if Intelsat files.

Fitch's Top and Tier 2 Loans of Concern's combined lists total $258.5 billion, exceeding 18% of the loan index. This is up from $233.6 billion last month and well above the $102.1 billion of February's pre-pandemic total. The Top Loans of Concern total jumped to $69.4 billion from $54.8 billion in March. Retail, energy, healthcare/pharmaceutical and telecommunications together account for 60% of the Top Loans of Concern's outstandings.

Last month, we raised our 2020 default forecast to 5%-6% from 3%, equating to roughly $80 billion of volume which would top the record $78 billion from 2009. In addition, Fitch projects an 8%-9% default rate for 2021. If the expected recession becomes prolonged, a double-digit default rate is conceivable for 2021.
...

https://www.fitchratings.com/research/corporate-finance/record-loan-defaults-anticipated-in-april-as-rate-approaches-3-22-04-2020

In Hollywood, virus outbreaks usually cause zombie apocalypse.  In real life, the C19 virus outbreak is killing zombie(s) (companies).

Link to comment
Share on other sites

I've been thinking about how bad defaults could get, and IMO it is hard to tell because some companies have received extension of terms or agreements for delayed payments. But this isn't a short-term problem. Like the comment earlier in the thread about junk bonds being junk, companies overloaded with debt show how big the problem is during a downturn.
No idea how bad this could be for REIT's and others depending on rent payments, or oil prices, consumer spending, etc. 

How do I go long on loan defaults - can retail customers buy credit default swaps or are is this already priced into that market?

 

Link to comment
Share on other sites

  • 1 month later...

* bump *

The Fed is trapped by their ZIRP policy. They can't let the zombie companies fail en masse or the banks and whole financial system might collapse.  For context, see:

Emphasis is mine:

Quote

With highly questionable legality on top of a 100% certain moral hazard, here are the details of the Fed's new Secondary Market Corporate Credit Facility
...
    The Facility will leverage the Treasury equity at 10 to 1 when acquiring corporate bonds of issuers  that are investment grade at the time of purchase.
    The Facility will leverage its equity at 7 to 1 when acquiring corporate bonds of issuers that are rated below investment grade at the time of purchase and in a range between 3 to 1 and 7 to 1, depending on risk, when acquiring any other type of eligible asset.
...
I think we need a new name to properly explain what it really is: an asset price support mechanism.

Not only is the facility a legally questionable moral hazard, it is also nothing but an asset prices support system that keeps zombie corporations alive.
...

https://www.thestreet.com/mishtalk/economics/feds-new-program-will-buy-junk-bonds-with-7-1-leverage

Link to comment
Share on other sites

On 4/24/2020 at 9:49 AM, Wally Fairway said:

I've been thinking about how bad defaults could get, and IMO it is hard to tell because some companies have received extension of terms or agreements for delayed payments. But this isn't a short-term problem. Like the comment earlier in the thread about junk bonds being junk, companies overloaded with debt show how big the problem is during a downturn.
No idea how bad this could be for REIT's and others depending on rent payments, or oil prices, consumer spending, etc. 

How do I go long on loan defaults - can retail customers buy credit default swaps or is this already priced into that market?

With the Fed propping up bond prices, people can lose sight that the underlying fundamentals of the company that issued the bond can still go to shit. The Fed actions can further hide the zombies, but it doesn't correct the underlying problem; however it could take years/decades for the shit to actually hit the fan - and for that reason I'm out. Out of trying to figured out retail CDS opportunities.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.



×
×
  • Create New...