S&P Says ‘Wave Of Defaults’ Expected In 2012 As Interest Rates Rise
Posted By thestatedtruth.com on December 2, 2010
That’s why they call these types of high yield high risk bonds ,” Junk Bonds”……  High-yield, or junk, debt is rated below BBB- by S&P and an equivalent Baa3 by Moody’s Investors Service.
So the governments of the world take interest rates down to current ultra low levels and leave them there for a prolonged period, forcing investors to take more risk for yield, then when rates rise, the roof falls in as the bonds crash in value. These loses could be horrific for people dependent on yield for income. If this happens, the cost to governments because of higher interest rate expenses will also be huge, and what ever austerity measures we are seeing now will pale in comparison to 2012’s forced austerity.
Higher interest rates and refinancing risks will likely prompt a “second wave of defaults†in Europe in 2012 and 2013, particularly among leveraged buyouts, according to Standard & Poor’s.
The 12-month European default rate may rise to as high as 7.5 percent in 2012 from an expected 4 percent by the end of this year, S&P analysts led by Paul Watters in London said in a report. The rate reached a peak of 14.8 percent at the end of the third quarter of 2009.
The default rate could rise “materially†as a high proportion of loans in the high-yield B- and CCC categories remain vulnerable due to excessive leverage, the analysts wrote. A substantial number of weaker junk companies with 229 billion euros ($302 billion) of leveraged loans due by December 2015 could face difficulties refinancing, according to the report.
“A combination of overleveraged balance sheets and higher spread margins against a rising interest-rate environment will likely result in more restructurings as shareholders’ attention moves to creating value on new transactions,†the analysts wrote. “We therefore see a high likelihood of a second wave of defaults, mainly among leveraged buyouts.â€
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