Global Corporate Defaults Just Hit 100, On Pace To Surpass Financial Crisis Record

The bizarre financial paradoxes unleashed by central planning continue.

While the S&P rises to new all time highs day after day, the IMF is about to downgrade global growth again, $13 trillion in global bonds trade with a negative yield, and the shape of the US yield curve is where it was the last time the US entered a recession. But what remains the most perplexing aspect of the unprecedented disconnect between market surreality and fundamentals, is the ongoing surge in corporate defaults, which is now on pace to surpass 2009, the worst year in history for corporate bankruptcies.

According to S&P, with half of 2016 in the history books, corporate bond defaults just hit the milestone "century" mark, or 100, last week, rising by 50% from the number of bankruptcies at this time last year and the highest level since the US emerged from recession in 2009. The number rose by four to 100 in the first full week of July, as defaults in the US oil and gas sector ratcheted higher, according to Diane Vazza of S&P Global Ratings, the FT reports.

As a result, the total amount of defaulted debt has risen to $154 billion.

But what is most troubling is that at the current run-rate, with half of 2016 still to come, the global debt default total is on pace to surpass 2009 for the all time corporate bankruptcy record.


And somehow this soon to be historic default cycle is supposed to be taking place in a time when not only has no major economy admitted it is in a recession (because, as everyone knows, it is all about confidence) but the S&P 500 keeps making new record highs daily.

Defaults have - so far - been led by energy companies, specifically low-rated crude producers, which have been slammed with a shortage of liquidity unable to secure (or refi into) new debt since oil began to tumble two years ago, while collateral bases shrunk substantially. That has forced many companies to renegotiate debt obligations with creditors, file for bankruptcy protection or miss interest payments.

More bankruptcies in the massively indebted energy sector are guaranteed as oil still trades at prices below profitable levels for many energy producers, and especially those with significant junk debt.

The latest defaults included distressed debt exchanges from oil group MD America Energy and FTS International, the largest private well servicer in the US, as well as a missed payment by telecommunications group Goodman Networks. S&P believes US defaults will rise to 5.3% less than one year from now, up from 3.8% a year ago.

“So far, there has been little spillover effect into other sectors, but we are not ruling this out in the coming quarters,” Vazza said. “We also expect this stress on many US oil and gas companies to persist with continued low oil prices.”

We, on the other hand, expect that - as the following chart from Morgan Stanley clearly shows - as the corporate default cycle is only now starting to ramp up, that the inevitable tsunami of bankruptcies will ultimately be the catalyst that forces the central banks to lose control as there is only so much insolvent reality that the "magic men" can bend to their will.