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Jan 15, 2007 7:56 pm
The Wall Street Journal Thursday reported that no less than 71% of companies with Standard and Poor’s credit ratings had junk-quality ratings – BB and below—in 2006, up from 32% in 1980. An astounding 42% of companies with credit ratings were rated single B, the lowest possible credit rating that isn’t vulnerable to immediate default. Only 7% of rated companies were single B in 1980. So does B stand for Bankruptcy – or just for harmless, profitable Bubble?
 
http://www.prudentbear.com/articles/show/125
 
Jan 15, 2007 8:41 pm

Dobe that's an interesting article.

I have to ask, though, isn't it simply possible that S&P has the number of lower rated/smaller companies that it covers?

Jan 15, 2007 8:49 pm

Great find. The article analysis would suggest we all pay attention to quality. I think it is saying that hedge funds and international junk are to drivers of a bubble that could create a really ugly situatuation if our Fed raises interest rates. While many await an interest rate cut, bad news on inflation could precipitate a sort of melt down in this market. I worry about inflation. Quality, quality, quality.

Jan 15, 2007 10:06 pm
joedabrkr:

Dobe that's an interesting article.

I have to ask, though, isn't it simply possible that S&P has the number of lower rated/smaller companies that it covers?



er...correction "....possible that S&P has INCREASED the number of lower rated/smaller companies that it covers...."

And by the way, I generally agree with many of the concerns raised in the article.

Jan 15, 2007 10:13 pm
doberman:
The Wall Street Journal Thursday reported that no less than 71% of companies with Standard and Poor’s credit ratings had junk-quality ratings – BB and below—in 2006,
 

I'd like to see a link to that article. If you look at that Lehman US Universal index, junk is only 8% of the total outstanding debt, and junk corporate debt is only 6.2% of the total debt outstanding.


Fitch ratings in their 3Q06 Bond book, have junk corporates as about 20% of the total corporate debt outstanding.


Now it could be that there are many many small issuers of junk debt, that show up in the bank loan markets (roughly 1/3rd of bank loans are junk).


But low grade debt has historically always been an unpopular form of investment. And as the credit cycle ages, we will soon see why that is so.



Jan 15, 2007 10:15 pm
planrcoach:

Great find. The article analysis would suggest we all pay attention to quality. I think it is saying that hedge funds and international junk are to drivers of a bubble that could create a really ugly situatuation if our Fed raises interest rates. While many await an interest rate cut, bad news on inflation could precipitate a sort of melt down in this market. I worry about inflation. Quality, quality, quality.



If it's inflation you are afraid of, then junk is the place to be. Higher coupons mean shorter durrations, and inflation makes debt service easier because you have more nominal dollars to throw about.


I have some old framed Israel Bonds from the 1970s, a few years of 200% inflation made quick work of the domestic shekel bond market.

Jan 15, 2007 10:59 pm

I'm afraid of stagflation. I believe inflation, and increased interest rates (along with the need to attract foreign investment in our increasing debt), could dampen the business environment. That of course would be poison for junk, if default rates increase. I realize the analyst consensus is positive for 2007, and large caps are flush with cash. Something tells me to be a little contrarian in the asset allocation.

Jan 16, 2007 11:28 am

Allreit,


What is the percentage if you ex out US gov't and Agency debt?


Then what if you ex out Muni Debt too?


All things being equal wouldn't the percentage (Junk to overall) keep going down as the US debt keeps going up?


Mr. A

Jan 16, 2007 1:22 pm
mranonymous2u:

Allreit,


What is the percentage if you ex out US gov't and Agency debt?





Fitch has Junk being about 20% of the total corporate debt market. In
the grand scheme of things it isn't a huge market. The entry of GM/F
into the junk market also distorted things somewhat. Ditto for all the
formerly investment grade bonds from companies that did LBO's.



Basicly, you don't encounter serious amounts of junk debt unless you go
looking for it. Which thanks to floating rate and high yield funds,
alot of people do.












Jan 16, 2007 7:43 pm

Joe, I considered the possibility that the number of companies receiving an S&P rating were more than in the early '80's. I think a more appropriate comparison would have been the number of "rated" companies in the mid- to late '90's (including internet-related companies). Regardless, I find it very disturbing that that many companies possess substandard ratings.