Beware The Distressed Credit "Canary In The Coalmine"

Tyler Durden's picture

The credit cycle is called a "cycle" because, unlike the business cycle (which the Fed has convinced investors no longer exists), it 'cycles'. At some point the re-leveraging of the balance sheet - remember more cash on the balance sheet but even morerer debt (as we noted here) - requires risk premia that outweigh even the biggest avalanche of yield-chasing free money. It appears, as Bloomberg's James Crombie notes, that point may be approaching as yield premiums for U.S. distressed debt hit a five-year high on March 25, according to Bank of America Merrill Lynch.


h/t @jtcrombie

BAML’s distressed debt index was at a spread of 2,483 basis points — the highest level since March 18, 2009 when it was at a spread of 2,609 basis points.

Of course we have explained this won't end well...


US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.


Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.



This won't end well...

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drinkin koolaid's picture

How about 3x leveraged Bull ETF bullish  --  Yippee!

THX 1178's picture

Double bullish? Damn, thats bullish!

El Vaquero's picture

It's bearish.  Which is bullish these days.  BTFD!

FieldingMellish's picture

I thought all credit was AAA in the New Normal?

disabledvet's picture

I've become your little "angry dinosoar toy" you used to have as a kid so you might want to get used to that. Obviously you're pretty bright or I wouldn't bother...and as usual this is a good comment...and while I have pretty much disagreed for many years with pretty much everything financial on this site (they're looking good on the Battlefront however) te one area that has been dispositive is "views on credit to be taken seriously."

So, yes...this is far from a totally meaningless screed as is so often th case in what passes for journalism these days. but we need a correction before we "Sally forth to our financial doom" here.

"Ot was te Fed that popped this bubble." Apple called the top "to the minute" pretty much and this is beginning to get noted over at SA. In short...despite te total extinction of short sellers oh these many years "we do have some forensic evidence that at one time they did exist."

So to answer what I take as a question ("all credit is triple aaa" --insert hardy har-har here) well, indeed...according to WALL STREET it is...but not according to the Fed. in ZH parlance "they monkey hammered that bitch a year ago."

in short "don't think you phucking credit We the People's credit risk anymore." The fact of the matter is not...nor even if it was could it be since interest rates are already super low...and sure look to me like they're about to head a lot lower.

In other words..."you're god damn right that's triple AAA credit. start buying." Good luck managing the risk.

Dr. Engali's picture

It's a wonder we can accomplish anything in this country with such short term thinkers. We must borrow moar money to prop up our stock price and kick a little cash to the shareholders instead of investing for the future. What a bunch of idiots.

Gypsyducks's picture

A wise Japanese man once asked me how many times US companies filed earnings reports in a century.  It was obvious he wasn't actually looking for an answer.

rosiescenario's picture

Agree this will not end well....but when?

buzzsaw99's picture

old yeller will buy them

drinkin koolaid's picture

It must be the weather!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Luckhasit's picture

Why not just get a capital one card? What's inyour wallet?  

holdbuysell's picture

Does anyone know why, in 2009, C rated spreads went much higher than Distressed spreads?

Unnatural Selection's picture

My guess is that in this distressed benchmark, the companies are already in bk.  This means the amount of assets and liabilities are generally known, and the spread is largley a question of discounting the known variables.  For C rated assets in 2009, the future was very unkown -- how long would a company burn through liquidity before it filed, and what would its assetes and liabilities look like at that point was unkown.  The market charges (rightfully) for uncertainty.  Anyway, that's my guess. 

Dead Canary's picture

Canary in the coal mine?


q99x2's picture

The old credit cycles of times gone by are now a cycle of FRAUD backed by the NATO military industrial complex. 

It ain't the same. This time is really different. Much much worse.

lucyvp's picture

You know, comparing spreads to treasuries will lead to distortians when the benchmark is falling in credit quality too.  :-)  maybe we should compare to Johnson and Johnson bonds, or some other bond that does not have a negative cash flow.

ItsDanger's picture

You lost me at morerer.  Is that even a word?  Paging GWB.