Debt and No Defaults

Junk bonds and bank loans continue *not* to default.

But a funny thing happened on the way to the meltdown: According to Moody's Investors Service (MCO ), junk-bond defaults actually fell in 2006 for the fifth straight year, to 1.7%--well below the long-term average of 5%. The story is the same in the booming leveraged-loan market, which, thanks to more flexible borrowing terms, has become a favorite of the private equity firms raising billions for leveraged buyouts and the hedge funds that buy most of that debt. By the end of 2006, leveraged-loan defaults slid below 1%, an all-time low.

Some private equity players see a major structural shift at play: Greater liquidity across the capital markets and the explosion of sophisticated financial instruments, they say, are reducing the level of risk permanently. But others say the cycle is just being delayed, possibly leading to a harsher crash when it turns. "The big question is whether the excess money is simply giving weak companies all the rope they need to hang themselves," says David T. Hamilton, Moody's head of credit default research.

The level of risk is reduced permanently (!) by liquidity and financial instruments. Really? The second in particularly is a dangerous thought. Can you really increase the amount of cash available from the enterprise by how you slice it?

Full article from Businessweek here

Posted on January 24, 2007 and filed under Finance.