Junk Bond Defaults Soar; Citigroup "Uneasy"

Bloomberg is reporting Junk Bond Defaults Rise for Sixth Straight Month.

Companies with high-yield, high-risk debt defaulted at an annual rate of 2 percent in May compared with 1.7 percent in April, the sixth consecutive month of increases, according to Moody's Investors Service.

The global default rate may rise "sharply" to 5 percent by the end of 2008 and 6.3 percent a year from now, according to a report written by Kenneth Emery, Moody's director of corporate default research in New York.

"Many speculative-grade issuers will face mounting financial pressures over the remainder of the year as a weak economy negatively impacts issuers' revenue growth,'' Emery said.

In addition to a rise in bankruptcies, investors should also expect lower recoveries for high-yield debt than in prior cycles, wrote JPMorgan Chase & Co. analysts led by Peter Acciavatti in a report Friday.

Loan recoveries will be lower than the historical average of 75 cents on the dollar and below 35 cents on the dollar for high- yield bonds, analysts for the New York-based bank wrote.

Meanwhile ....

Citigroup says Banks Uneasy About $6 Trillion Credit Lines.

Banks are concerned that companies may draw on $6 trillion of loan commitments they made before the credit crunch, adding to pressure on their balance sheets, Citigroup Inc. analysts said.

Companies from luxury carmaker Porsche SE in Stuttgart, Germany to wireless company Sprint Nextel Corp. in Overland Park, Kansas, drew at least $21 billion of bank lines this year as borrowing costs rose. Lenders had $6.1 trillion in untapped commitments at the end of 2007 up from $3.3 trillion in 2003, according to Citigroup estimates.

"We suspect many banks remain uneasy about their committed loan facilities," Citigroup analysts led by Hans Lorenzen in London wrote in a note to clients published on June 6. Companies typically maintain credit lines to back the financing of their day-to-day operations. They don't usually draw on the loans.

Companies may be tempted to draw on the lines because average interest costs have surged to as much 155 basis points over the benchmark London interbank offered rate, or Libor, from 20 basis points a year ago when Porsche negotiated its 10 billion-euro acquisition line, Bloomberg data show. A basis point is 0.01 percentage point.

Tapping Credit Lines Fueling M3

Want to know what's behind a soaring M3? There it is. Businesses are afraid the money won't be there later and/or credit lines will be completely shut off, so they are drawing down those lines now.

And with defaults soaring and recoveries lower, Citigroup has every reason to be spooked. Think this is inflationary? Think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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