Guggenheim's Minerd: "Zombie Companies" Will Be Crushed By Rising Libor

Guggenheim's Scott Minerd became the latest respected investor to declare that the widening Libor-OIS spread (which we've been pointing to for the past month) is the most overlooked trend in markets right now.

In his interview outlining his bearish view on markets, Minerd explained how US corporations that embarked on a debt binge during the ZIRP era are headed for a rude awakening as interest rates rise.

And the canary in the coal mine, so to speak, will be the rising Libor rate. As it continues to climb, companies could soon start experiencing difficulties in borrowing money and servicing debt.

"The thing I'm concerned about is this rise in Libor and the repricing of bank loans. If my view of the world is right, a year from now we're going to have interest rates up 100 basis points and Libor somewhere around 3.5% or 3.25%. And believe it or not that would begin to soak up a lot of the free cash flow for below investment grade companies," he said.

"There are a lot of companies that are zombie companies that survived the last cycle," he said. "We just saw iHeart - any number of comapnies. As these companies have their debt repriced by the market with rates going up, it's going to be harder and harder (for them) to stay alive."

Adding to the stress on highly levered firms, Minerd explained, would be the Trump tax reform plan, which limits companies' ability to deduct their interest costs.

Circling back to the flattening yield curve, Minerd explained that the Fed's insistence on hiking will send short-term rates on a crash course with long-term rates, which are anchored.

"The 10-year note is already 3% as we're sitting here so there's not a lot of room for the long end to move up.

Guggenheim is, Minerd said, is "moving away" from high-yield debt and bank loans - just as the credit risk for some of the world's largest banks is flashing red. The Libor-OIS spread has risen to its widest level in nine years this week, rising to 54.6 bps or the most since May 2009 after 3M USD Libor rose for the 30th consecutive day from 2.2225% to 2.2481%.

IOS

And as we pointed out earlier, the stress in money markets in the US, UK and Europe is rippling across the globe...

Comments

BanksterMind Thu, 03/22/2018 - 19:29 Permalink

Enjoy, it's all a show anyways. Last time I check the Titanic was still sinking and we're on it.

Can you buy yourself a place in the life raft?

Will your kids?

 

 

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regular Thu, 03/22/2018 - 19:35 Permalink

during uncertainty
of war,
alcohol stocks and tobacco stocks do well

if expected outcome of war is more grim,
wall street will crash very hard

itstippy Thu, 03/22/2018 - 21:32 Permalink

If this has been such a wonderful prolonged period of robust economic expansion, why are there fears of tightening credit markets?  I've been told that corporations experienced record profits for years now; their coffers are brimming with surplus cash.  Tighter credit markets and higher interest rates should be a terrific boon to them; they can put all their surplus capital to work.

Corporations need ready access to low-interest credit in order to service their existing debt?  WTF?  Who's running their accounting departments, Mike Tyson and Fifty Cent?

 

duckhunter Thu, 03/22/2018 - 22:31 Permalink

It's about time.

I own a debt free business manufacturing machines in the USA. All my competitors are cheap knock off "zombie" companies that have essentially been subsidized by the government with ZIRP. They borrow regularly using interest only loans at nearly zero interest and then borrow to pay the balloon. They make very little because they offer their cheap imported crap at sale of the century discounts every weekend. Basically fooling the customers, their lenders and themselves. They should never have had the situation available to be in business like this. 

I have been waiting for the turn of the tide to make them all go away. The world is oversupplied and this is why.