While U.S. equity markets have experienced significant volatility and equity indices are close to 30 percent off their recent record highs, leveraged corporate credit — high yield bonds and leveraged loans — arguably have taken a more significant hit, according to a commentary in The Hill. On April 2, Fitch Ratings revised its baseline and downside scenarios for corporate defaults in the U.S. and Europe in 2021-2022 to a range of 12-15 percent and 17-25 percent, respectively. By comparison, 2019 ended with a 3.1 percent default rate. There are many reasons the COVID-19 recession of 2020 may become a catalyst for a U.S. restructuring and bankruptcy cycle of materially longer duration, according to the commentary. Factors involved with this prediction include:
- Extended periods of economic growth allow for structural excesses — a decline in lending standards, excessive leverage, financial engineering without underlying economic purpose — to accrete and build to dangerous levels.
- Having fired more than a few bullets to shore up investor sentiment during the early moments of the COVID-19 outbreak, the Fed’s future financial wherewithal is uncertain.
- The durability of the post-2008 financial architecture has yet to be tested widely.
- The uncharted effects of the shutdown on considerable swaths of the economy due to COVID-19.
- Still in the earliest stages of acknowledging potentially permanent changes in consumer behavior and economic organization to adequately assess a company’s valuation.
