Monday, March 15, 2010

We Told You So:High Yield Debt is Next

The NY Times today finally has an article on the explosion or implosion of high yield debt. We wrote about this two years ago when this down turn, a nice term if you will, for the current economy. They seem to indicate about a trillion of such debt coming due in the next three to four years.

They state:

When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster. Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could create a glut in the debt markets.

With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.

We saw Sirius and then Fairpoint, and the list goes on. There is really well over two trillion in such poorly structured high yield debt, the old junk bonds. It will take the Times about another year or two to catch on to this one.

The Times continues:

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

That is because the record number of bonds and loans that were issued to finance those transactions typically come due in five to seven years, said Diane Vazza, head of global fixed-income research at Standard & Poor’s.

We see that this will cause additional depression on major segments of the market. Even large companies like Verizon live on debt and this may very well drive up the cost of debt, an ersatz inflation.

The Government debt will add to the problems just when all whatever is breaking out. The geniuses in Washington will be creating the next perfect storm just in time for the 2012 election, Mayans notwithstanding.