Bank loans are becoming harder to obtain. Meanwhile, credit ratings on corporate bond issuers are improving. The freight train represented by credit tightening is hurtling down the track, but it hasn’t arrived at the station yet.
As escalating default and bankruptcy rates make bond investors increasingly risk-averse, we can expect to see a growing number of basically sound companies’ bonds trading at depressed prices. And that means opportunities for distressed debt investors will increase materially over the next year.
Most investors believe the Fed is done or nearly done with its inflation-fighting interest rate hikes – and so far, no recession is in sight. That means perceived risk will remain subdued in the high yield bond sector... for now.
Corporate bankruptcies are running at their highest rate since 2010, the year after the Great Recession. As defaults rise, investors will likely become more cautious about taking credit risk and it should become easier to find attractive values in lower-quality bonds.
In our view, the distress ratio is likely to double or triple from its current level by late 2023 or early 2024. And that means a crop of new distressed opportunities will soon arise.
America is not yet lost. But we are very close to the complete collapse of not only our financial system, but our entire way of life.
The reality is that the Fed’s actions could have the near-opposite effect of QE. Instead of easing financial conditions and boosting asset prices, they’ll likely lead to further tightening and hasten the arrival of the impending credit crunch.
In light of the past week’s extraordinary market events, we’re releasing this “state of the markets” briefing.
In today's special edition of Something You Don't Know, you'll find an important briefing from credit analyst and author Martin Fridson, who leads Porter & Co.’s Distressed Investing team.