Effects of 'forced generosity'
This â€œforced generosityâ€ of the credit markets, directed by Fed policy, has a few important effects on the economy and investors.
- Pretty much every company that stands at least a few yards shy of deathâ€™s door has been able to refinance its high-cost debt, firming up its financial affairs, buying time and, for many, forestalling balance-sheet distress or even bankruptcy due to still-sluggish revenue and cash-flow production for many.
- As a result, much of the disaster risk has been stripped from the low-grade bond and loan markets. Itâ€™s hardly an exaggeration to say that, thanks to this refinancing boom, there are virtually no debt maturities of consequence among â€œjunkâ€ borrowers until 2016, or even 2017. The rush to lock in low rates has been the corporate version of taking advantage of low-rate credit-card balance transfers, hoping their income improves by the time the debt comes due or rates jump higher.
- While this might seem like an unearned gift to riskier companies and their creditors, itâ€™s fair to say the ability of so many borrowers to roll over their debts rather than shrink or fail has saved, at least temporarily, tens or even hundreds of thousands of jobs. This points up the Fedâ€™s broader policy of doing what it can to float the economy long enough for private-sector job momentum to build and consumer finances to recover.
-Trouble is, the policies are keeping many flawed companies alive and independent that should probably fail or be restructured â€“ and the day of reckoning is likely to come in a few years, when interest rates are higher and the financing window has shut for them.
To put some numbers on this â€œtoo hard to failâ€ situation, for the past four years the default rate among both junk issuers and leveraged-loan recipients has been below 2%. Over the next three years, the total amount of debt maturing is meager, with $58 billion due in 2014 and an average of $94 billion a year through 2016 â€“ out of a total of more than $2 trillion outstanding. With no important maturity volume until 2017, J.P. Morgan analysts predict default rates will remain below 2% for the next couple of years.