JUNK BOND DEFAULTS RISING

Heavily indebted companies defaulted on $6 billion worth of junk bonds in August, the most since October 2020 when the COVID War was grinding the U.S. economy, Fitch Ratings reported.

More defaults are ahead for the outstanding $1.5 trillion in junk bonds, defined as securities assigned a rating of BB or lower by Standard & Poor’s and Fitch Ratings, or Ba or lower by Moody’s Analytics.

Fitch values the junk bond market closer to $1.7 trillion when mid-size companies not included in common indexes are figured into the calculation.

Companies with bonds rated B—one of the lowest rungs on the junk-bond ladder—now make up 25 percent of outstanding junk bonds, compared with 11 percent in 2010,  Frank Ossino, who manages a leveraged loan fund at Newfleet Asset Management, told The Wall Street Journal.

About twice as many bond issues saw their ratings downgraded as upgraded in the past three months, the widest spread since October 2020, the Bank of America reported.

Companies with sinking bond ratings include well-known names such as Bausch & Lomb and B&G Foods, which makes Cream of Wheat cereal.

The junk bond market doubled during the past decade as companies borrowed heavily to fund takeovers and also to avoid conventional lending venues, the WSJ noted.

The same heavily leveraged companies that issued the flood of junk bonds survived the COVID War due to the U.S. Federal Reserve’s near-zero interest rate, which allowed teetering companies to borrow more.  

As the Fed began raising interest rates this year, companies at risk were squeezed even harder as their borrowing costs rose.

UBS and other investment banks have warned that the Fed’s announced plan to keep raising rates to weaken inflation is “a canary in the credit coal mine” for junk bonds, as Morgan Stanley’s analysts wrote in a note to clients.

About 1 percent of junk bond issues have defaulted so far this year, the WSJ reported.

That figure could rise to 3.25 percent next year, according to an analysis by Barclays, while a Fed survey of lending officers at major U.S. banks found a consensus that as much as 4.5 percent could be in default a year from now.

That would be significantly less than the 7 percent that went bad in 2020.

Also, most of the risky bonds now outstanding will not mature for at least three years, Fitch noted, giving troubled companies some time to get their financial houses in order.

TREND FORECAST: We said it in “Will Junk Bonds Turn to Junk?” (14 Sep 2021) and “Value of Corporate Bonds Ranked as ‘Junk’ Doubles in 2022” (10 May 2022): junk bonds really are junk.

Junk bonds were in trouble as soon as the Fed laid out a timetable for ending its bond-buying spree and raising interest rates.

Now that the Fed has done both, the number and pace of defaults will accelerate.  

Among the most overleveraged companies, at least 4 percent will disappear, be bought for cheap by competitors or Bigs, or survive through the Chapter 11 bankruptcy courts.

TREND FORECAST: As Gregory Mannarino clearly illustrates in his article this week, “Here It Comes AGAIN! Another Big Bank Bailout.”, “Today there is no connection whatsoever between what is happening in the stock market and the economy,” and that the central banks and governments will do all they can to keep equities and economies artificially high. And, the bottom line is that the more they do to help them, the more it costs We the Little People of Slavelandia, since the more cheap money they inject into the economy, as evidenced by the data, the higher inflation rises: The higher inflation rises it costs more to buy less.