Note that the 53% cumulative default rate for junk bonds over the next five years foreseen by Deutsche Bank analyst Jim Reid is nearly twice the level forecast by Moodys of 29%, It is also well in excess of the rate during the S&L crisis, which produced a nasty but comparatively short recession.
About 53 percent of U.S. companies that issued high-risk, high-yield bonds will default over the next five years, according to Jim Reid at Deutsche Bank AG.
The figure compares with a 31 percent five-year rate in the early 1990s and 2000s, and as much as 45 percent “in a very, very different market in the Great Depression,” Reid, the London-based head of fundamental credit strategy, wrote in a note to clients today. The estimate is based on the premium investors demand to hold the notes and assumes recoveries from the defaults will be zero, Reid wrote.
Yves here. No recoveries would seem to be an awfully aggressive assumption, but we have noted that the widespread use of “cov lite” loans means a much higher proportion of companies will enter bankruptcy in a much weaker condition than in past downturns (covenants enable lenders to force restructurings earlier in the process, when there is more to salvage). Thus a higher proportion will wind up liquidating. However, note that the recovery assumption is independent of the default rate estimate. Back to the article:
“Given that this recession will easily outstrip the 90s and 00s, then 40 percent high-yield defaults over five years seems to be a minimum starting point for this default cycle,” he wrote. A 50 percent rate is “not unrealistic.”…
According to Moody’s Investors Service, the 12-month default rate will rise to 22.5 percent in Europe and 13.8 percent in the U.S. by the end of the year, the New York-based firm said in a report last month.
Moody’s expects the five-year default rate to be about 29 percent by February 2014, according to the report.
“The main catalyst for this crisis, namely property, is still vulnerable around the world,” Reid wrote. U.S. real estate prices still have more than 16 percent to decline, while the figure is almost double that in the U.K., Reid wrote