Fisher Investments Editorial Staff
Investor Sentiment, US Economy

Credit Where Credit's Due

By, 09/23/2010
 

Story Highlights:

  • The US corporate debt default rate is now expected to dip below pre-crisis levels by yearend— proof positive healthier credit markets are making great strides in restoring liquidity to businesses.
  • Just two years ago, credit was scarce for companies with even the most sterling credit ratings, let alone for those with risky ones.
  • Even companies with "junk" credit ratings have access to ample capital today—and many are using that capital to improve their fiscal standings.
  • Increased earnings, a favorably low-interest rate environment, and investors regaining an appetite for risk have also helped pare down the corporate debt default rate by providing firms with another avenue for liquidity.

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Widely unimaginable following 2008's financial panic, the US corporate debt default rate is now expected to dip below pre-crisis levels by yearend—proof positive healthier credit markets are making great strides in restoring liquidity to businesses. What follows next could be a boon to the US economy and labor markets. 

The corporate debt default rate measures the percentage of companies with the lowest credit ratings failing to meet debt obligations over the past 12 months. Moody's reports that percentage was 5% in the 12-month period ended August—a sharp drop from a peak of 14.6% in November 2009—and expects that number to fall below 3% this year for the first time since August 2008.  

Just two years ago, credit was scarce for companies with even the most sterling credit ratings, let alone for those with risky ones. During that time, companies unable to access fresh capital to pay debt obligations spurred a wave of corporate debt defaults, heightening panic and further locking up credit markets.  

Fast-forward, and the credit situation is looking much better. Moody's list of companies with the lowest credit ratings—rated B3 or below with a negative outlook, or six steps down from investment grade—is down to 195 companies as of the end of August from a high of 288 in June 2009. The shrinkage shows even companies "junk" credit ratings have access to ample capital today—and many are using that capital to improve their fiscal standings. 

Positively, banks have been retreating from their cautious stances lately, reporting easing lending standards in July and increased commercial and industrial (C&I) lending in July and August. Banks have mostly favored large and mid-size companies in extending new loans, with small companies still facing some difficulties in securing credit. But positively, the Fed recently noted banks eased lending to small firms in July for the first time since late 2006. And the aggregate impact from these small businesses doesn't significantly detract from the overall rosier lending picture and won't limit overall economic growth too much. 

Additionally, increased earnings, a favorably low-interest rate environment, and investors regaining an appetite for risk have also helped pare down the corporate debt default rate by providing firms with another avenue for liquidity. According to Dealogic, companies sold over $175 billion in junk bonds this year so far to investors seeking higher yields—beating 2009's record. Risk appetite is a noteworthy indicator of investor confidence in credit markets and future economic growth. 

As more companies are able to refocus their attention on growth rather than worrying about meeting debt obligations, they should help positively drive continued recovery in both the economy and employment.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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