This post originally appeared on my old website last March. That said, it’s still highly relevant today as the implications from the easy money trend haven’t fully been realized.
Global QE has turned the stock and bond markets into a corporate welfare program. Junk rated borrowers only defaulted about 2% of the time in 2014.
The speculative-grade default rate, which tracks so-called junk-rated issuers, fell to 2% last year, down from 3% a year earlier, according to Moody’s. That’s the lowest since the 1% recorded in 2007, which was a more than quarter-century low. The historical average default rate among junk-rated companies is 4.5%.
Oh by the way, since investors are gobbling up yield like it’s cocaine, issuers are finding ways to protect entities and add risk to investors. This trend is only going to get worse over time.
“Investors are freely and liberally trading a lot of covenant protection for the opportunity to be in the high-yield space”
How does this play out? Who knows. Perhaps it’ll take something that will wake up the general public to these disappearing covenants. Or possibly, the government will intervene.
Maybe companies will continue to find funding for some time with global rates so low. If that happens, it’s a recipe for worsening corporate behavior. At some point we’ll hear some amazing figures about these zombies and wonder how they amassed so much debt.
Regardless, it’s something to keep an eye on over time with default rates abnormally low.
Thanks for reading!