"This Is A Very Scary Scenario": Restructuring Legend Warns Of Coming "Perfect Storm"

Two months ago, we brought to your several very concerning quotes from some of the nation's top restructuring bankers, of which the most dire warning came from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis who admitted that: "I do think we're all feeling like where we were back in 2007. There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

What he is referring to is not just the overall level of exuberance, but the lunacy taking place in the bond market, where CLOs are being created at a record pace, where CCC-rated junk bonds can't be sold fast enough, and where the a yield-starved generation of investors who have never seen a fair and efficient market without Fed backstops, means that the coming bond-driven crash will be spectacular.

"Even if there is not a recession or credit correction, with the sheer volume of issuance there are going to be defaults that take place," said Neil Augustine, co-head of the restructuring practice at Greenhill & Co. He is right: as we showed recently using the following chart from Credit Suisse, after languishing around 1%-2% for years, default rates have jumped the most in 5 years, and are now "ticking higher."

Fast forward to today when another Wall Street legend, Jim Millstein, the banking veteran who was the restructuring chief at the U.S. Treasury Department during the 2008 financial crisis and who yesterday agreed to sell his restructuring firm to Guggenheim Partners,  said the next economic downturn could now strike in less than two years, and in an interview with Bloomberg TV, warned that the US trade wars currently being waged are likely to "reduce business investment, increase costs to consumers and producers in the U.S. and reduce the sales opportunity for U.S. producers."

Previously, Guggenheim's CIO Scott Minerd said he expects a recession within two years, citing mounting corporate debt that would likely spur more defaults and a sharp decline in employment, and in a tweet earlier this week warned that "Markets are crazy to ignore the risks and consequences of a #tradewar. This rally in #stocks is the last hurrah! Investors should sell now, speculators may do better in August."

However, besides some rather vague concerns about a broader economic slowdown, Millstein also listed the specific catalyst for the next crisis: the record amount of piled up debt that has been piling up on corporate balance sheets in the past decade during periods of record low rates.

He said that the mounting wall of debt in corporate America could spur a downturn because higher interest rates constrain investments, and warned that the excessive use of leverage in the technology and industrial industries make them vulnerable if the economy worsens, calling the convergence of so many negatives a “perfect storm.”

“This is a very scary scenario,” he said. “There’s going to be real financial distress.”

To those unfamiliar with the dynamic, here is what happened: since 2009, the amount of debt accumulated by global, non-financial junk-rated companies has soared by 58% representing $3.7 trillion in outstanding debt, the highest ever, with 40%, or $2 trillion, rated B1 or lower. Putting this in contest, since 2009, US corporate debt has increased by 49%, hitting a record total of $8.8 trillion, much of that debt used to fund stock repurchases. As a percentage of GDP, corporate debt is at a level which on ever prior occasion, a financial crisis has followed.

The coming debt deluge is also the reason why Guggenheim was eager to purchase Millstein's restructuring advisory firm: when the next recession hits, traditional banking revenue streams will collapse leaving restructuring advisories as the only winner.


Rothbardian in… Thu, 07/12/2018 - 17:08 Permalink

Moar doom porn.


Seriously though, the mechanisms we all learned in school don't work anymore.  Interest rates?  Tell me what you need them to be and we'll just fiat that.  Whoa, that caused some market disequilibrium.  Guess I'll just put some capital controls over here.  Viola.  Whoa, what happened to asset prices?  Lemme just do some price controls and subsidies over here.  Selling the long bond everyone?  Fine, we'll just control P at the Fed and scoop all that up.

And on and on it goes....


The economic Jenga tower getting too complicated?  No worries we'll just start over.  Who can we blow up this time?  China?  Russia?  Iran?

Snaffew Rothbardian in… Thu, 07/12/2018 - 17:24 Permalink

I wouldn't call it doom porn...it is an inevitable reality.  Anyone who thinks this can go on forever has been blinded by the largest financial engineering project in history.  it shows how fucked the global economies are as they have to resort to massive debt printing to keep the system alive.  It will crash...it's just a matter of time.  When it happens, the downside will be about 10 times faster than the upside ride was.

In reply to by Rothbardian in…

Farqued Up Snaffew Thu, 07/12/2018 - 17:41 Permalink

All of that increased debt went for stock repurchases. Of course, they had to spend some on capital equipment to stamp out smaller portions of food items for increased prices.

Basically, debt is being exploded and nothing to show for it, not even some new planks on the rural wooden bridges. Anyone ever worked in industry knows that the maintenance has to be going into the trash bin. Problems are being compounded.

In reply to by Snaffew

gdpetti Farqued Up Thu, 07/12/2018 - 18:04 Permalink

10 times faster? perhaps... it should, but the puppet masters want to 'milk it'.... they feed off of this negative stuff.... the longer it lasts the better for them... they aren't out to 'fix' it, but to do another '29 Bank of Morgan on it.... 'out with the OWO, in with their NWO'... these puppets aren't necessary any more for anything but self-destruction of themselves and the system they represent... global jihad.... global regime change... global chaos.... there's a much, much bigger 'game' going on...


In reply to by Farqued Up

LawsofPhysics Thu, 07/12/2018 - 17:10 Permalink

The motherfuckers in banking and finance continue to socialize PRIVATE losses and STEAL REAL WEALTH via their bought-and-paid-for congress and exclusive access to money they create out of thin fucking air with NO REAL RISK and NO REAL WORK!!! Even better these fuckers at the Fed are CHARGING EVERYONE EVEN MORE INTEREST!!!!!!

What is the interest rate on that savings account sucker? Roll the motherfucking guillotines, nothing changes otherwise!

Will it collapse? Place your bets, the Fed's Casino is still open debt slave!!!

abgary1 Thu, 07/12/2018 - 17:24 Permalink

The bubble of everything has been caused by the central banks.

The economy cannot operate on zero interest rates and QE forever.

We need to get to market price discovery for asset valuations and create a system where the demand for debt determines interests rates not the other way around.

End the central banks and neo-classical economic theory.

To learn how illogical neo-classcial economic theory really is, please read Debunking Economics: The Naked Emperor Dethroned? by Steve Keen. Support, intellectually and financially, his efforts to develop new economic theories that are relevant to the complex, dynamic and chaotic economy and markets that exist. www.patreon.com/ProfSteveKeen/

Duc888 Thu, 07/12/2018 - 17:33 Permalink



No shit.  absolutely nothing that caused the Lehman incident in 2008 was "fixed".  Let the bullshit show go on, and on, and on...


Paulson and the other bank robbers were never even charged.

No More Bubbles Thu, 07/12/2018 - 17:46 Permalink

"Even if there is not a recession or credit correction"

What a ridiculous comment.  We all know those things have been outlawed by the Fed. -sarcasm tag-  It won't be a recession, it'll be the mother of all depressions that's been brewing for over 30 years of obscene credit expansion!

affirmed_78 Thu, 07/12/2018 - 17:51 Permalink

The whole system is designed to not only eliminate average people's wealth by disincentiving savings with low rates, but also to lure them into more and more debt.  It's working beautifully so far.  And when the fat cat rent seekers take on too much risk and need a bailout, they've got the Fed in their hip pocket. 

djsmps Thu, 07/12/2018 - 18:01 Permalink

Clever use of that term "perfect storm".




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GotAFriendInBen Thu, 07/12/2018 - 18:52 Permalink


What does one do for this title?

Prognosticate with lots of worthless qualifiers?


"said the next economic downturn could now strike in less than two years,"

Let it Go Thu, 07/12/2018 - 19:07 Permalink

The IMF warned last year that 22% of U.S. corporations are at risk of default if interest rates rise.

 Reuters reported recently that “Share buybacks proliferate when the market is rising but evaporate when the market collapses.” In many ways, the decision way back in 1982 to again allow stock buybacks may highlight the true meaning of the phrase. "Been there, done that, learned nothing."

 http://Stock Buybacks Driving Market-Where It Might Take Us.html