By Cliff Montgomery – Feb. 22nd, 2010
Corporate Debt accumulated during the George W. Bush years of eased regulation may create a secondeconomic crash by 2013, according to DailyFinance, a financial Internet magazine.
“Wall Street’s love of leverage is threatening to turn around and bite it in the assets,” states an articlepublished by DailyFinance this January, “as many companies find their issuance of debt could potentiallybecome their undoing.”
Here’s the deal: For all the talk about the ‘end of the Great Recession’–at least for bailed-out Wall Streetmillionaires–there is still a gargantuan amount of debt on corporate books.
Big Business primarily stacked up this debt from 2003 to 2007. The massive debts will come due by 2013 or2014 at the latest.
Companies already are hurting from the Wall Street meltdown of 2008, which itself was brought on by acombination of corporate greed, unregulated gambling and a lack of serious investment.
The inability of Big Business to refinance its remaining liabilities will force it to pay a high rate of interest on itsdebt. This can only whittle away corporate earnings and force a number of companies into bankruptcy.
How far-reaching is this ticking time bomb?
Standard & Poor (S&P) judges that at least 807 speculative grade issues were created in America from 2006through 2009.
“While only 82 (11%) of those bonds have defaulted,” stated DailyFinance, “an alarming number of theseissues still have below investment-grade ratings and are very much at risk of default.”
The coming corporate debt tsunami was discussed in an S&P study released in late January. Its analysis ofAmerica’s second impeding economic meltdown was telling:
“Based on the maturity schedules of all rated U.S. fixed- and floating-rate corporate bonds and bank debt, weestimate high-yield refunding needs of $42 billion in 2010, growing to $87 billion in 2011, $159 billion in 2012,and $244 billion in 2013,” stated the report.
“If revolvers are included, the total exposure is $53 billion in 2010, rising to $120 billion in 2011, $198 billion in2012, and $277 billion in 2013,” according to the S&P study.
“The share of speculative-grade rated debt to total rises to 45% by 2013–up from 11% in 2010, 21% in 2011,and 27% in 2012,” the report added.
However, the S&P study projects a 2010 default rate of ‘only’ 5% to 6.9% for speculative grade debt. Bycomparison, the 2009 default rate was 10.9%.
But some financial analysts believe the second debt crash will be worse than S&P is willing to admit.
“You have too much debt coming due, and not enough money to refinance it,” John Lekas, president and CEOof Leader Capital Corp., told DailyFinance in January. Leader Capital Corp. currently runs a short-term bondfund.
Lekas flatly insists that another stock crash is sure to happen by 2014 at the latest. He also expects that onceagain we will see America’s financial double standard on display. Lekas predicts that Big Business will have adecent chance to refinance its debt for the short term, while smaller companies–and most individuals–willagain be shut out.
Lekas states that a second meltdown will be especially harsh on intermediate corporate bonds and junkbonds, once the debt finally comes due.
“You’re going to see more downgrades, and spreads are going to re-expand,” Lekas told DailyFinance. “Thelight at the end of the tunnel is a train.”
Of course, no one precisely knows what is going to happen when all of this corporate debt comes due. But weknow that banks are reluctant to extend debt financing in today’s depressed market.
So can anyone sincerely believe that these same banks will freely extend debt lines in 2013, when 45% of allloans–nearly half–may prove to be little more than acts of wild speculation?
You don’t have to be Geronimo to hear this train barreling down the track.
