Wendy's insights playing out

Investment Analysis Clubs Macro Economic Trends and Risks
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Wendy has been beating the drum in a number of her posts that as interest rates are ratcheted up, companies that rely on junk bond financing will start to default and potentially go under. I think she refers to them as “zombies”.

This WSJ article tells the story of this starting to unfold - just as Wendy told us it would.

Financial pain is spreading in the junk-loan market, showing how interest-rate increases are hurting debt-laden companies and worrying investors that a credit crunch looms as the economy slows.

Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020, when pandemic shutdowns hobbled the U.S. economy, according to Fitch Ratings. The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say.

Interest payments on the loans float in lockstep with benchmark interest rates set by the Federal Reserve. The higher the central bank raises rates, the tighter the squeeze on companies that borrowed when rates were close to zero.

…

Companies at higher risk of default run the gamut from mattress maker Serta Simmons Bedding LLC to software company Avaya Holdings Corp. and restaurant-equipment supplier TriMark USA LLC, according to Fitch.

…

Companies with single-B ratings—one of the lowest rungs in the junk-debt category—now account for about one-quarter of leveraged loans outstanding, compared with 11% in 2010, said Frank Ossino, manager of a leveraged-loan fund at Newfleet Asset Management.

The trend is accelerating. Around twice as many loans received credit-rating downgrades as upgrades in the past three months, the highest multiple since October 2020, according to research by Bank of America. Downgraded companies included eye-care company Bausch & Lomb Corp. and Cream of Wheat maker B&G Foods Inc.

More at this link.

https://www.wsj.com/articles/junk-loan-defaults-worry-wall-s…

I wonder how many zombies are out there?
'38Packard

  • look out below
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I would have never thought Serta was a zombie. Wow. This is troubling.

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I would have never thought Serta was a zombie. Wow. This is troubling.

When money has no cost, executives figure out all sorts of ways to spend it. First on their mind is lining their own pockets, but in order to justify that, they have to make their companies grow. One way is by acquiring other companies (not necessarily at bargain prices) by taking loans. Another is by “buying” market share- which is fine as long as the cash flow to pay the interest is compensated for by extra revenue (some of the companies that show up on Saul’s board are likely in this category). Another is by using borrowed money to pump up dividends and stock buybacks and, if cash flow doesn’t compensate for the interest, even “well-run” companies (Boeing comes to mind) could be in jeopardy.

To be called “junk”, it simply means that the balance sheet is out of whack (like in nearly all cruise lines, for example).

Jeff

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The more over time a company sells a more common good the lower the margin goes to hold the market share. These sorts of companies become run for the management not the shareholders. The management borrows a lot of money over time to pay itself.

Morton Salt is a commodity company with a lot of debt. Just a little understated salt company.

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According to the Fed, 10% of listed companies are zombies.

https://www.federalreserve.gov/econres/notes/feds-notes/us-z…

Junk bond spreads are rising – spreads OVER the Treasury yields which are also rising.

https://fred.stlouisfed.org/series/BAMLH0A3HYC

Junk bond CCC yields are up to 15% and rising. Take a look at what happened in 2002 and 2009.
https://fred.stlouisfed.org/series/BAMLH0A3HYCEY

What will happen to these companies when their ultra-low yield bonds mature and they have to refinance?

Wendy

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When money has no cost, executives figure out all sorts of ways to spend it.

How big can a glassy-eyed zombie be? I have held, for several years, that by conventional measures, Boeing is bankrupt. Negative equity of over $14B, negative tangible assets of $25B. Net debt of $47B

Steve

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When money has no cost, executives figure out all sorts of ways to spend it.

Politicians too.

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When money has no cost, executives figure out all sorts of ways to spend it. First on their mind is lining their own pockets, but in order to justify that, they have to make their companies grow.

You might even say that the Serta execs made their own bed and now they have to lie in it.

Mike

1 Like
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<<When money has no cost, executives figure out all sorts of ways to spend it.>>

Politicians too.

Not accurate. Politicians figure out all sorts of ways to spend money, both when money is cheap, and when money is dear.

https://j.mp/3wGMS88

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