Moody’s: the default rate for junk bond could rise 14.9%

The rapid deterioration in the global economic outlook makes company default rate could raise to the levels that are never seen since the Great Depression. Moody’s expected the default rate for junk bond could rise 14.9% by the end of next year. It’s the highest level since 1932 when default rate peaked at 15%.

Here is from FT.com:

The default rate for speculative or junk-grade debt could rise to 14.9 percent by the end of next year, the highest level since 1932 when it peaked at 15 percent, according to ratings agency Moody’s Investors Service.

This is the agency’s most pessimistic scenario, with the main so-called baseline forecast rising to 10.4 per cent for the end of 2009, a marked jump from a month ago when it was predicted to rise to 7.9 per cent. This jump is a result of expectations of a steeper US downturn, which will undermine growth across the globe.

Default rates rose to 10.5 per cent in 2001 following the dotcom crash and 12 per cent in 1991 after property prices slumped. The default rate is currently 2.8 per cent and expected to rise to 4.3 per cent by the end of this year.

........

Moody’s bases its forecast on expectations of rises in the US unemployment rate and average junk bond yields, which are trading at 1,450 basis points over government paper, a dramatic jump since the collapse of Lehman on September 15 when they were trading at a premium of 1,035bp.

A level of 1,000bp usually suggests a company is in danger of default. At the end of August the average high yield spread over government paper was 810bp. In July last year, it was as low as 300bp.

Significantly, the lowest rated high-yield debt – debt with ratings of Caa, Ca and C – makes up more than 20 per cent of all junk bonds, the highest ever level and a rise from about 15 per cent at the start of the year.

The iTraxx Crossover index on Wednesday rose to 834bp, or €834,000, to insure €10m ($12.5m) of debt over five years, compared with 760bp at the start of the week.

While Standard & Poor’s on October 16, expects the rate of default in the U.S. speculative-grade segment to increase materially in the next 12 months, reaching 7.6% by September 2009, the highest level in nearly six years. Under a “pessimistic scenario,” the rate could go as high as 9.6%.

Standard & Poor’s said, “In our baseline scenario (to which we’ve assigned a 60% probability), we expect the U.S. speculative-grade default rate to escalate to a mean forecast of 7.6% in the next 12 months (through September 2009), with a one-standard-deviation range of 6.5%-8.7%. This predicted range is multiples higher than the 2.68% trailing-12-month default rate observed in September 2008 and the 25-year low of 0.97% in December 2007.”


S&P said factors contributing to incrementally higher downside risks for U.S. defaults include:

• A deep freeze in the lending markets as a result of unprecedented volatility and seismic changes in the financial markets beginning in September. The funding difficulties reported even by blue-chip corporations underscore the extreme conditions facing corporate borrowers and connote trouble for firms most in need of capital.
  
  
• Deepening recessionary conditions in the U.S. For example, payrolls have now dropped for nine consecutive months, causing the unemployment rate to increase to 6.1% from 4.4%.
  
  
• A larger proportion of speculative-grade issuers than at any other point in history.
  
  
• The highest volume of low-rated issuance since 2003.
  
  
• A greater impact of seasoning in the ‘B-’ or lower rating categories, referring to the phenomenon that companies seldom default during the first few years after accessing the public debt markets, regardless of the initial rating assigned.

Related Posts :

Total credit losses of the financial sectors are almost $1T

Sources :

FT.com: Moody’s forecasts surge in defaults, November 12, 2008 18:00
Research Recap: S&P Expects US Junk Bond Default Rate to Triple, October 16th, 2008

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Total credit losses of the financial sectors are almost $1T

According to FT.com, Total credit losses of the financial sectors are approaching $1 trillion due to drop value in mortgage backed and other debts securities. Since the beginning of 2007, AIG, the insurer that has twice been bailed out by the US government, has lifted total losses of $914 billion.

IMF raised its estimate of the likely total losses in the financial sector to $1,400bn, from $945bn in April. Last week, analysts at Morgan Stanley estimated that European financial institutions would need an additional €83bn ($104bn) of capital if the current economic downturn proved as severe as the early 1990s.

Image courtesy of FT.com
Sources :

FT.com: Financial groups’ losses near $1,000bn, November 12 2008 23:31

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

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Pakistan to receive $7.6 bln package from IMF

Pakistan and IMF has reached an emergency loan agreement to support the restoring domestic confidence amid global financial crisis that hits Pakistan.

The Country is severing serious balance payment difficulties. Total amount of the package is $7.6 billion in 23 months standby arrangement. Pakistan is facing economic crisis tied to struggling the country against Islamic Militants. The loan carried an interest rate of between 3.5 and 4.5 percent and will be received in two years period.

Earlier this year, the government has cut its massive subsidies on fuel and essential goods that pushed a deficit of budget to over 7% of GDP in the year through June.

In attempting to fight the country’s inflation, On November 12, The State Bank of Pakistan raised its benchmark rate by 2% to 15%. It’s the most interest rate in more than a decade.

ETFs/Stocks :

Claymore/BNY Mellon Frontier Markets ETF (FRN)

Related Posts :

Fitch Downgrades Several Emerging Markets

Sources :

Bloomberg: Pakistan Agrees to $7.6 Billion IMF Bailout Program (Update1), November 15, 2008 05:32 EST
CNN Money: $7.6 billion IMF loan for Pakistan, November 15, 2008: 9:09 AM ET
Breitbart: IMF, Pakistan agree on $7.6 bil. emergency financing package+, November 15 09:53 AM

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

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Philadelphia, Phoenix and Atlanta ask for the Treasury bailout

Cities Request $50 Billion in Aid, Aid Would Come from TARP;
Treasury Secretary Henry Paulson Has Denied Such Requests;
Cities Include Philadelphia, Atlanta, and Phoenix;
Obama Supports City Aid-Bloomberg Video
The Current financial crisis gives more pressure to the local state government. After California warns that the state may not be able to finance its budget. Now, the mayors of Philadelphia, Phoenix and Atlanta turn to ask the Treasury Department to set aside $50 billion of the $700 billion Troubled Asset Relief Program to spur infrastructure investment to create jobs and lift local economies. The mayors also asked for loans to cover short-term borrowing needs and to meet payroll. But Mr. Paulson denied such request.

Here is from WSJ:

In a letter to Treasury Secretary Henry Paulson, the mayors warned that their dire fiscal situations would result in layoffs and tax increases that would place another drag on the economy as the country tries to climb out of a recession. The chances of getting TARP funding appear remote, however.

On Wednesday, Mr. Paulson reiterated that the focus of the program is "to stabilize financial institutions and strengthen the financial system," rather than to provide assistance to state and local governments.

Philadelphia Mayor Michael Nutter, who is leading the campaign for federal help, said the mayors are targeting TARP because it has already been approved by Congress. "If our federal partners have a better source of funding, that's fine with me," he said.

One option would be a stimulus package that would include infrastructure spending that could benefit cities. Tom Cochran, head of the U.S. Conference of Mayors, which hasn't sought TARP help, said many mayors are hoping that Congress will take some action soon on a stimulus package that would include aid to cities.

In the past week, the National League of Cities and the U.S. Conference of Mayors both called for government funding for local infrastructure projects that can be ramped up quickly to create jobs and economic activity. On Thursday, the mayor's group said it had identified 4,591 infrastructure projects, from repairing sewer lines to renovating libraries, that would cost $24.4 billion and create more than 250,000 jobs.

Philadelphia, which has a $4 billion budget for 2009, faces a $108 million shortfall, nearly half from slower business activity and a drop in sales taxes, and the rest from lower real-estate-transfer and wage taxes. "Our revenues have fallen off the table," said Stephen Agostini, the city's budget director. Philadelphia's roughly $4 billion pension plan, which covers 33,000 retirees, had losses of more than $600 million through September.

In Atlanta, Mayor Shirley Franklin told city employees that a projected shortfall of as much as $60 million this year would result in a hiring freeze and a 10% reduction in wages and work hours of municipal employees beginning in December and lasting through June. That is in addition to layoffs of 350 employees earlier this year. "This is an emergency," said Ms. Franklin.

Sources :

The Wall Street Journal: Cash-Strapped Big Cities Seek TARP Funds to Stimulate Local Economies, November 15, 2008
Bloomberg Video: Video: In-Depth Look: Cities Seek Federal Aid, November 14, 2008 01:46 pm EST

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Citigroup to raise its credit card interest rate

According to The New York Times, Citigroup Inc. (C) plans to raise its credit card interest rate although it has pledged to not raise the interest rate in any time and any reason a year ago when credit start to be tightened and threat customers. The Commitment to not raise its credit card interest rate was made to congress in early 2007.

The Raise interest rate decision was attributed by Citigroup to the difficult market environment when borrowing costs and credit risks continue to rising. The Policy change would only partly offset a $1.4 billion third-quarter loss for its credit card unit. But the company did not specify the details.

The Credit card borrowing will be raised by 2-3%. It will cause some borrowers to pay more than 20% interest rate annually. This Decision only considers its economic reasons but doesn’t care customer’s reasons.

See also my previous posts:

• There are $915 billion in U.S. credit card debt may blow up has major financial institutions like Citigroup, American Express, and Bank of America. Click here.


• Fitch Ratings Agency said on November 3, that U.S. credit card portfolio losses will increase in the year ahead, with measures of credit continuing to deteriorate into 2009, and with some issuers surpassing historical loss peaks before 2009 is over. Click here.


• There are no investors eager to buy credit card security cause credit card bond sales at zero. No demand for credit card asset backed bonds. Click here.


• American Express (AMEX), the credit-card giant, gain access to a chunk of the $700 billion in federal funds being pumped into financial firms. Click here.

Sources :

Despite Pledge, Citigroup to Raise Credit Card Rates, Blaming ‘Difficult’ Environment,November 14, 2008

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.