Blight of the living dead:
SPEAKING AT A Loan Market Association (LMA) conference in October, Ian Cash, head of Alchemy Partners’ £300 million ($509 million) Special Opportunities Fund, drew an alarmed gasp from an already rather anxious audience by revealing that his five-year expectation is for default rates in the European high yield market to rise to an eye-watering 50%. This prediction is doubly startling considering the figures involved. According to Fitch Ratings, €145 billion B-rated corporate debt is due to refinance in Europe by 2016, €86 billion of which is highly leveraged, pre-crunch LBO debt. In the US, $1.7 trillion high-yield loans were written in 2006 and 2007 alone. Clearly, if default rates range as high as Cash is suggesting, this could become a very big problem indeed. Recovery rates are likely to be much, much lower than historical experience as well.
Headline-grabbing as default predictions such as this are, they conceal the fact that, in this downturn, even some corporates that don’t default could be as much of a concern as those that do. Those companies become zombie companies – firms that are underperforming but refuse to die because the lax documentation that crept into the lending market in the boom years acts as a life support machine to a terminally-ill patient.
