
Corporate defaults hit highest level since '09 bust - randomname2
http://www.usatoday.com/story/money/markets/2016/04/18/defaults-hit-highest-level-since-09-bust/83003002/
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sna1l
This headline should be more specific. Energy companies definitely will see
increased default rates. This can easily be evidenced by big banks like JPM
and Wells Fargo putting 500 million more in their loss provision accounts.

For a couple years, while energy prices were sky high, these companies were
given loans, expecting that energy prices would hold. Obviously that isn't the
case, and these prolonged depressed prices will cause defaults to increase.
Banks for the most part don't hold a big percentage of energy loans in
comparison to their total loan portfolio. But I imagine regional banks in
Oklahoma, Texas, etc with large energy exposure will have significant trouble.

Saudi Arabia is getting their wish, just at a much slower rate than
anticipated.

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mdorazio
Looks like 13 of the 46 defaults were companies in Oil & Gas. In 2015 there
were a total of 67 US defaults, a quarter of which were oil & gas. So if we
compare year over year, it's still somewhat troublesome, but not quite "the
sky is falling" territory. It will be interesting to see how companies deal
with their debts accumulated as a result of large stock buyback programs and
stagnant demand, though.

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sna1l
Money is so cheap to borrow currently, why stop buying back shares with money
you don't have!? :)

~~~
iofj
TLDR: volatility.

Exactly because money is so cheap to borrow, and the volatility that will
result. The problem is the difference small moves in interest rates will make
to your debt payments. It's the same problem as with oil. Oil has made small
moves to the upside in the past few months, about $10/bbl. Such a move used to
represent 5-10% of the price, but now it's a difference of 33-50% depending on
your exact point of reference. Like penny stocks, small absolute values result
in massive relative moves. This distorts markets and will cause management
teams to make disastrously wrong decisions because they're being fed wrong
information.

(I'm exxagerating the values here to illustrate what's going to happen)

You loan $100M at 0.25% (and like everybody, count on revolving credit) =>
Interest payments are 250k/year

FED decides to slightly raise interest rates (or you get downgraded, or
there's a lot of other companies going broke and the banks need it, or the
bond market crashes, or ... and for one of these reasons your rate goes up)

You still have $100M loaned, but now you owe $500k/year. A 100% increase in
your interest expense.

And God help you if interest rates where to go anywhere near the normal
minimum (4%) or their historical average (6%).

Now it is not realistic for even very good companies to borrow at 0.25%, I
used that value for effect, but a more realistic value is 1.5-3% for AAA rated
companies, 2.5-8% for other ratings, 6%-15% for junk rated companies. Keep in
mind however that the higher ratings go up more.

So one can expect interest payments for these companies, if the FED interest
rate predictions are accurate (ie. 1%-1.5% by end of this year), to jump by 33
up to 50% for AAA companies, ~70-100% for companies with other ratings and may
God have mercy on junk rated companies.

~~~
mdorazio
Doesn't this assume non-fixed rate loans, though? If you take out a $100M loan
at 0.25% fixed then any movements by the Fed won't really affect you until you
need to take out another loan. I've been under the impression from articles
like [1] that the loans being used to fund stock repurchases are somewhat
fixed rate.

[1] [http://www.zerohedge.com/news/2014-07-08/stock-buyback-
shock...](http://www.zerohedge.com/news/2014-07-08/stock-buyback-shocker-
companies-using-secured-bank-loans-repurchase-stock)

~~~
iofj
They are, but they are relatively short term, 1-2 years. Plus companies don't
just take out one, but they take them out regularly (and have done so for
quite a while now). Since they revolve the credit, they effectively become
variable interest rate.

So when interest rates go up, they go up on 5-15% of the total debt every
month or so. This does generate a delay.

Unfortunately public companies don't have to disclose their financing
conditions, so data on this is inaccurate at best unless you work at a bank.

