Corporate Credit Crisis Worsens in U.S.


In America, investors’ concern over the prospect of defaults that could emerge in the corporate credit world, which has swollen in value by trillions of dollars since the financial crisis, rose this year.

The $9.8 trillion corporate bond market has seen values decline by over 10 percent in the last year, with declines worsening in the last two weeks as investors fear growing defaults, lower earnings, and pressured profit margins among American companies.  Experts also fear that a global slowdown in growth will also impact U.S. firms, as they have bet heavily on expanding demand for American goods and services abroad.

Investors and analysts have warned that corporate debt, especially the high yield market known as “junk bonds”, could suffer a significant decline in value because of a rapid and accelerating selloff. Last week, investment firm Third Value Management announced it would halt all redemptions from hits high yield funds while it liquidates all holdings. Shortly after that, Stone Lion Capital Partners made a similar move with its $400 million credit fund as the firm cited “substantial” redemption requests from investors forcing the fund to sell off in a market that was rapidly declining.

The two executives at Stone Lion came from Bear Stearns, the investment bank that shuttered after over a century of operations, during the Global Financial Crisis in 2008. Stone still manages $900 million in other assets, although it remains unclear whether those funds will also face redemption requests after the announcement regarding its high yield fund.

Finally, on Monday, Lucidus Capital Partners announced it would liquidate its entire portfolio in a move that will impact $900 million of junk bonds and similar assets. Many analysts warn that similar outpouring of capital from junk bond funds are likely to follow.

Produced Goods Demand Falls

In a move that will pressure parts of the corporate market, demand for produced goods continues to weaken.

According to the Producer Price Index for November compiled by the Bureau of Labor Statistics, final demand rose 0.3 percent, indicating a rise in demand at the end of the production chain. However, this was due to a rise in prices for final demand services, which rose 0.5 percent while prices for goods and raw materials continued to fall.

At the same time, the demand for ‘final goods’ fell 0.1 percent on an adjusted basis in November, indicating weak demand for goods used for personal consumption, capital investment, government use, and export.

Demand for intermediate goods was significantly weaker. The intermediate demand index for processed goods fell 0.6 percent and prices for unprocessed goods fell 5.1 percent. Intermediate demand, which indicates business purchases for uses besides capital investment, is an indirect indicator of how much growth businesses expect and how much cash they are willing to exchange for future inventories.

With demand falling for final and intermediate goods, it appears that growth will be under pressure short-term from both businesses and consumers.