What a shock – the Fed didn’t raise interest rates yesterday. Their next chance is in December – we’ll see if they chicken out then, too.
Markets continue to obsess over whether Janet Yellen will raise interest rates this year. But when it comes to corporate credit quality, they are missing the big picture. Corporations are in bad shape. They are far more leveraged than they were on the cusp of the financial crisis. Their precarious condition is disguised by 8 years of zero interest rates. Now that the Fed is contemplating raising interest rates, their disguise could be ripped off.
But that isn’t their biggest problem. Because if the Fed chickens out and doesn’t raise rates, they are still in big trouble – maybe even bigger trouble. Because if the Fed doesn’t raise rates, it means that it believes the economy is too weak to handle even a tiny 25 basis point rate increase. And that’s downright pathetic.
Right now, there are a number of zombie companies that are still haunting the landscape solely because of low interest rates. These companies carry huge debt loads but the cost of servicing that debt is very low due to the fecklessness of the Federal Reserve. They are losing tons of money in their businesses but have been able to borrow (or extend their existing borrowings) due to complacent financial markets. Remember – bond and bank loan investors don’t want to report defaults to their investors if they don’t have to. So they are perfectly content to allow borrowers to “extend and pretend” their loans until some time in the future when they are forced to face the music.
Thus far in 2016, 122 companies have defaulted around the world. The tally would be much higher if interest rates were anywhere near normalized. Here is a short list of companies that will join this list if interest rates begin to rise, either because the Fed gets aggressive (which is highly unlikely) or because investors wake up to the fact that their businesses are weak and incapable of repaying these debts.
No matter how you slice it, these four companies are headed for disaster… Continue reading…