Credit Crunch 2.0

[Real Money]

Federal Reserve Bank of Boston President Eric Rosengren said on Friday the U.S. central bank may need the power to buy a broader array of bonds to provide stimulus given the sharp and historic decline in Treasury yields amid the coronavirus outbreak.

Just thinking back to the last financial crisis here...but....seems like Rosengren is getting nervous. Found this article...

https://www.eurasiareview.com/11032...ing-credit-crunch-the-next-shoe-to-drop-oped/

"...what they [are] worried about is a fat tranche of BBB rated securities that has mushroom fivefold since 2008 to $3.4 trillion and is precariously perched on the cliff-edge. The slightest shock could lead to a cascade of downgrades."

and this little gem

"...most of the $2.4 trillion leveraged loan market is being packaged into collateralised loan obligations on 'cov-lite' terms with scant protection for creditors and is now an accident waiting to happen."

In summary,

“There are mounting risks of a credit crunch in vulnerable sectors of the corporate bond market. $3.4 trillion of US debt is perched precariously above junk grade, risking fire-sales in a financial crisis. A swath of highly indebted companies face an incipient funding shock and risk being shut out of the capital markets as the COVID-19 epidemic mushrooms into global crisis, Standard & Poor’s has warned….

...while the stock market is attracting all the attention, the real danger lies further below the surface in corporate bonds and leveraged loans, two IEDs that could explode at any time precipitating a wave of defaults that increase deflationary pressures and clear the way for another financial crisis.

This is why the Fed wants Congress to once again expand its tool kit so it can implement radical policies that save its constituents while the real economy tanks, the unemployment roles grow, and ordinary working people are thrown under the bus.

 

[Real Money]

Wall Street Stressed About Corporate Bonds As Coronavirus Crisis Mounts

https://www.investmentnews.com/market-slide-puts-focus-on-companies-balance-sheets-189722

“Our estimate is that there is potentially as much as a trillion dollars of high-grade bonds heading to junk,” he writes in a research note."

High yield spreads

GUGGENHEIM
“That supply would swamp the high yield market as it would double the size of the below investment grade bond market. That alone would widen spreads even without the effect of increasing defaults.”

That means companies would be facing higher borrowing costs just as they are most cash-strapped.

Investment grade bonds could get hit with downgrades soon

GUGGENHEIM
“As for stocks, technical analysis suggests that there should be support around 2600 on the S&P 500, but in a recession scenario a level closer to 2000 could be the ultimate outcome...”

“Many skeptics have challenged this idea, saying that the panic is close to an end. In this circumstance I recall the quote from Winston Churchill ‘This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.’”

 

[Real Money]

Lifelines Fray for Companies Close to Brink Before Meltdown
Eliza Ronalds-Hannon and Katherine Doherty

(Bloomberg) -- As credit markets around the world sputter and seize, distressed companies are watching financial lifelines that they were counting upon slip from their grasp.

Rescue deals have been scrapped and restructuring plans shredded as prospective lenders, partners and buyers adjust to a world suddenly dominated by talk of global recession, radically lower valuations and credit markets that treat deeply troubled companies as almost untouchable.

“We could have had meetings two weeks ago with clients telling them the types of financing options that were available. Many of those options are gone now,” said Steve Zelin, the head of the restructuring group at PJT Partners Inc.

Some companies contending with broken deals or a need to restructure have been quick to blame the coronavirus disruption as a central cause. Bankrupt shale oil driller Alta Mesa Resources Corp. on Thursday said the firm that promised to buy some of its assets pulled out of that deal at the eleventh hour, citing the “perfect storm of factors” posed by the pandemic and the oil collapse.

Others seized on the epidemic even though they had been in fundamental trouble for months or years, such as newly bankrupt Pier 1 Imports Inc. and coal miner Foresight Energy LP.

In some cases, companies haven’t been explicit about the demise of their plans, but there’s little doubt about why their deals had to be pulled. Canned food purveyor Del Monte Foods Inc. on Thursday postponed a $575 million debt deal crucial to its turnaround plan, without commenting on the cause.

A handful of other junk-rated issuers have pulled debt deals from the market so far this month, and investors will be watching next week to see if the turmoil affects the biggest restructuring target Frontier Communications Corp., which has been talking with creditors about a bankruptcy plan. Investors will also be watching to see whether deeply distressed energy companies such as Whiting Petroleum Corp. and California Resources Corp. can salvage themselves; both have interest payments coming due on March 15, and the latter has a debt swap expiring three days later....