Default ‘Wave’ of $1.6 Trillion Looming for Junk, Fridson Says

November 13, 2013 Leave a comment

Default ‘Wave’ of $1.6 Trillion Looming for Junk, Fridson Says

Almost $1.6 trillion of junk bonds globally will default between 2016 and 2020, according to Martin Fridson, chief executive officer of New York-based FridsonVision LLC, a research firm specializing in speculative-grade debt. With historical evidence indicating default rates will surge between 2014 and 2016 and persist, implying a rate of more than 30 percent cumulative during four years, Fridson estimated in a report for Standard & Poor’s Capital IQ Leveraged Commentary and Data that the face value of total defaults will be $1.576 trillion. That’s a market value of $752 billion, according to Fridson, who started his career as a corporate debt trader in 1976.“When the default tidal wave eventually hits, it will be very big,” Fridson said in an e-mail. “No one realizes how much distressed debt is going to be available for investment when it finally hits.”

The extra yield relative to government securities investors demand to hold the debt rated below Baa3 at Moody’s Investors Service and less than BBB- by Standard & Poor’s has widened to 438 basis points from 431 basis points on Nov. 1, the narrowest since May 22, according to the Bank of America Merrill Lynch U.S. High Yield Index.

The benchmark U.S. 10-year Treasury note’s yield will rise to 2.78 percent at year-end and 3.33 percent by the end of 2014, according to forecasts compiled by Bloomberg. Junk defaults worldwide fell to 2.8 percent at the end of last month from 3.2 percent in October 2012, unchanged from September, according to a Moody’s report dated Nov. 8.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

Junk-Bond Covenants Deteriorate With Record Sales, Moody’s Says

A measure of the strength of investor protections in speculative-grade U.S. bond offerings deteriorated in the 12 months ended September, according to Moody’s Investors Service.

Moody’s covenant-quality index, in which 5 indicates the weakest protections and 1 the strongest, rose to 3.64 from 3.41 in the year ended August, analysts Alexander Dill and Kyle Goodwin wrote in a report today. The measure for deals in September alone climbed to 4.05, the highest monthly reading in data going back to January 2011.

Corporate issuers sold a record $56 billion of dollar-denominated junk bonds in September, a 33 percent increase from a year earlier as speculation mounted that the Federal Reserve would soon start reducing $85 billion of monthly asset purchases that have bolstered debt markets and drove borrowing costs to the lowest ever, according to data compiled by Bloomberg.

“Investors’ continuing appetite for higher yields amid still-low rates on U.S. Treasury bonds has driven speculative-grade corporate bond issuance higher and covenant protections lower,” Goodwin said in a statement.

Covenants in speculative-grade debt offerings deteriorated in 21 out of 27 non-financial corporate sectors and subsectors over the 12-month period, according to the report.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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