S&P Ratings Services says that 46 companies have defaulted on $50 billion of debt this year, the highest level since 2009.
Of the world's defaults this year, 37 are of companies based in the U.S., USA Today
reported. Also of the 46, 13 are in the oil and gas sector, says Diane Vazza, head of global fixed income research at S&P Ratings Services.
“Stress in the form of persistently low oil prices, the tightening of 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,” said Vazza told the Financial Times.
“Defaults are clearly an issue for bondholders, since these events mean they no longer receive payments on money lent to these companies,” USA Today’s Matt Krantz reported.
“But the situations can be brutal for stock investors, too, as restructuring after a default can leave shares essentially worthless as the bondholders often become the new owners of the company.”
Krantz explained 3 lessons the rise of defaults hold for stock investors:
- Don't gamble on on energy stocks. Energy profits keep falling. Energy sector profits are expected to drop another 107% in the first quarter of 2016 - even worse than the 55% drop in the first quarter of 2015, says S&P Global Market Intelligence.
- Know when to fold, know when to run. "It will come back" are famous last words for investors, Krantz warns. When investing in individual stocks, especially some that could be even remotely flirting with default, it's best to cut losses short.
- Mind the edge of the bubble. “Companies don't usually just default without warning. Ratings agencies routinely rate companies' credit worthiness and sound an alarm when the financials deteriorate,” Krantz explained.
For now, the best investors – and companies themselves – can hope for is for robust earnings.
“The one hope is that earnings bounce back and company cash flows [improve],” Stephen Caprio, a credit strategist with UBS, told the FT. “If that doesn’t happen, [companies] will have debt to pay off and it is unclear how they’ll pay it.”
Meanwhile, other respected voices are urging savvy investors to sink their money in something else.
Jeffrey Gundlach, chief investment officer of DoubleLine Capital, said mortgage-backed securities are trading cheap relative to corporate bonds and a better bet because of the elevated risk of defaults in high-yield debt. “This would be a good time to be selling corporate bonds and buying mortgage-related bonds,” Gundlach told investors during a recent webcast, Bloomberg
Defaults in high-yield debt, especially loans to energy-related companies, are likely to rise, putting corporate debt as a category at higher risk, Gundlach said. Junk has rallied with Treasury bonds because Federal Reserve Chair Janet Yellen seems less inclined to raise interest rates, he said.
“The junk market was scared to death that the Fed was actually going to go forward with their suicide mission to raise rates four times this year, four times next year and four times the year after,” Gundlach said. “It’s not surprising that the same burst of enthusiasm for Treasury bonds, once the Fed seemed to abort their suicide mission, it also helped junk bonds. I don’t think that can continue any longer.”
(Newsmax wire services contributed to this report).
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