As The Credit Cycle 'Turns', Global Defaults Surge To 6-Year Highs

After asking rhetorically "if something just blew up in junk," as CCC-yields explode to crisis-peak levels - suggesting something "spectaculor" is occurring as one trader noted, The FT reports that, according to Standard & Poor’s, companies have defaulted on $78bn worth of debt so far this year with 2015 set to finish with the highest number of worldwide defaults since 2009.

Something is wrong...

 

Downgrades are at levels not seen since Q2 2009 (red solid line below)...

 

As the upgrade/downgrade ratio nears record lows (red dotted line above)...

 

And the number of distressed bonds trading reaches post-crisis highs...

 

As the percent of distressed loan deal soars...

 

So the soaring default rates, as The FT reports, are the latest sign financial stress is beginning to rise for corporate borrowers, led by US oil and gas companies.

The rising tide of defaults comes as investors reassess their exposure to companies, who have borrowed heavily in recent years against the backdrop of central bank policy suppressing interest rates.

 

Without a rebound in oil and commodity prices, and the Federal Reserve seen lifting its policy rate higher for the first time in nine years, strategists predict a further rise in corporate defaults for 2016.

 

The amount of debt owed by US companies relative to the size of their profits has been increasing, according to Alberto Gallo, macro credit strategist for RBS, with the proportion of the most indebted borrowers rising since mid- 2014.

 

“This tail of highly-levered borrowers is likely to be vulnerable to rising rates,” he said in a note to clients.

In other words, as junk bonds have been the leading edge to the domestic end of the “dollar” run, this demands close and ongoing scrutiny in light of a potential escalation.  After all, this is just another indication of how advanced the deterioration has become, when the “usual” carnage and selloff is no longer noteworthy, giving way to only the (possibly) spectacular.

 

Charts: Bloomberg