Ed Altman Warns Credit Market Looks Like 2007 Again, "Could Come To An End Very Dramatically"

Legendary bankruptcy expert Dr. Edward Altman, the creator of the financial-distress sniffing Altman Z-Score, warned in mid-2007 of a “Great Credit Bubble” and that there was going to be trouble in the market. He predicted that a meltdown would stem from corporate defaults. While the primary culprit of the financial crisis turned out to be mortgage-backed securities, investors who heeded Altman’s warning nevertheless avoided a lot of grief.

As a reminder, the Altman Z-Score is the output of a credit-strength test that gauges a publicly traded company's likelihood of bankruptcy. The Altman Z-score is based on five financial ratios that can be calculated from data found on a company's annual 10K report. It uses profitability, leverage, liquidity, solvency and activity to predict whether a company has a high degree of probability of being insolvent.

Troublingly, Yahoo Finance's Julia La Roche notes that Altman sees the reckless behavior of 2007 surfacing again.

“We’ve never had such a long benign cycle. And just that one little fact is something that we should be concerned about because if it comes to one and it could come to an end very dramatically.

 

“Back in 2007 prior to the crisis in ’08 and ’09, the fundamentals of credit risk of the companies issuing bonds and taking out loans were quite low,” he said.

 

And the similarity that I see now between 2007 and 2016 is very similar fundamentals, quite a bit high risk and it doesn’t seem to bother the market because it’s the only game in town in terms of getting yield greater than what you can get for low-risk securities like governments and high-grade corporates.”

 

“Speaking about the Z-score, if you compare the average Z-score of companies in 2007 with the average in 2016, which is the last time we looked at it, guess what. The average is actually lower today than it was in 2007, and 2007 was right before the great financial crisis, and of course, in ’08 and ’09 we saw a tremendous increase in corporate bond defaults and loans.

Click the image below for a link to La Roche's full interview...

Low Z-scores are associated with financial distress. Here are some examples from Retail, Tech, and Energy...

Altman concluded:

“So the good news is that it’s no worse, but the bad news is, fundamentally, the companies are no better than they were back in 2007 at least by our model.”

And, just as Moody's predicts, if the gusher of liquidity and low rates is about to end (Janet?) then a pessimistic scenario looks very ominous...

Comments

GUS100CORRINA Uncle Tupelo Mon, 06/26/2017 - 14:36 Permalink

Ed Altman Warns Credit Market Looks Like 2007 Again, "Could Come To An End Very Dramatically"My response: Since the CBs have been KEY MARKET BUYERS proping up this PIECE OF SHIT MARKET, when CBs stop buying, the MARKETS WILL CRASH and BURN!! So, KEYNESIAN economics will once again be shown to be an complete and utter failure.FED better put their last will and testaments in order and prepare to be BURNED AT THE STAKE by ANGRY PEOPLE and POLITICIANS!!!!

In reply to by Uncle Tupelo

Deep In Vocal … (not verified) Mon, 06/26/2017 - 14:30 Permalink

BECAUSE THE MAFIA RUNS THE SHOW!!!! All rigged all staged all a plan... IM SO DEPRESSED!!!!!!!!

Winston Churchill Mon, 06/26/2017 - 15:03 Permalink

But what about the shadow banking system Tyler ?Something the FedRes barely understands,let alone controls.It was the private repo market that brought it all down last time.We need an update please.

24Richie Mon, 06/26/2017 - 15:29 Permalink

Cprporate debt caused by borrowing to buyback shares and boost equity prices can be reversed by selling shartes, paying off debt, and reducing equity prices,

Md4 Mon, 06/26/2017 - 17:25 Permalink

Fed-induced bubbles are all we've had.

The underlying old economy has been dying a slow death since the economic coronary of 2008.

That hasn't been repaired or recovered because it can't be. The world, as we knew it, has been fading since the first jobs were sent abroad, never to return.

The Great Transfer should've taken a hundred years or more, but instead, owing to warped, shortsighted greed of western corporations, that period was lethally compressed to about forty.

The damage is severe and permanent.

Whatever shakes out after the "big one" won't be market-based anymore.

We will see we haven't just brought on a major crash, but instead, the end of an age...

Pollygotacracker Mon, 06/26/2017 - 17:19 Permalink

Question: How can the Fed possibly support the stock market and at the same time feed the beast in D.C so that our government can run obscene budget deficits? How do they do both? How can they create that much $ out of the thin air? Goofy.

decentraliseds… (not verified) Mon, 06/26/2017 - 18:29 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.