Corporate Defaults’ Dreary Drumbeat
The drought in external corporate issuance in May and June, after a record $200 billion volume prior to the Fed’s tapering talk and bond outflow frenzy, has been accompanied by a predicted doubling of default rates to around 5 percent of the total, as ratings downgrades now also outstrip upgrades. High-yield names which accounted for one-third of activity in the first half are likely to be shut out of the market for the rest of 2013 with existing debt service of only $25 billion due but the load spikes next year. In the meantime Brazil’s OGX has followed Mexican homebuilders into restructuring as creditors weigh local insolvency provisions which seem to favor banks over bondholders. In Europe a Hungarian telecoms firm and another Kazakh bank are in trouble while in Asia Hong Kong and Chinese property companies remain under the gun as prices dip to 75-80 and into the distressed category. In the US almost $1 billion in combined dedicated ETF launches took place before exits leaving the CEMBI down at a higher spread than its sovereign counterpart as the cross-over junk bond market also folded. According to the TRACE system weekly dealing of $5 billion has scrambled to keep up as Dodd-Frank restrictions ban prop desks and require higher capital provisions for inventory. The year-end forecast is in the $250 -$300 billion range and debuts which numbered over 100 through July will be scarce. Financial and hydrocarbon placements have dominated by sector and may not be able to resort to domestic sources for operating and expansion needs. European risks are prominent in Ukraine with the balance of payments squeeze on continued IMF program suspension, in Russia with the breakneck consumer lending pace, and in Turkey with private sector long-term debt of $150 billion a multiple of international reserves by the latest central bank data. Brazilian high-yield paper has sold off from contagion and industry weakness with anemic GDP growth there and utilities are also shunned in Argentina and Venezuela on political doubts. Asian commodity and infrastructure firms are reeling from China’s slowing and fiscal restraints on big projects.
Middle East and especially Dubai quasi-sovereigns have held up on property recovery, low immediate repayment obligations, and investor base diversion from regional turmoil. Egypt has again plunged into disarray after President Mursi was toppled by the army and replaced with an interim technocrat-led government with a former World Bank researcher as Finance Minister. IMF negotiations will stay on the “back burner” according to officials with Gulf neighbors pledging new support at triple the $4 billion facility originally under consideration. The Sawiris family running Orascom as a premier global debt and equity listing endorsed the ouster as a signal to resume investment at home after prolonged policy indecision and judicial investigation into previous transactions. Insider suspicion has turned to business executives associated with the Muslim Brotherhood who have been slapped with asset freezes as the revolution wields another blow.
