We stumbled upon these striking charts in an article in the Financial Times recently. It has interesting implications for credit analysis.
The last decade’s boom in credit has been remarkable, led, of course, by mortgage-backed securities. But debt funding by companies is a close second, if you count “corporates” and “money-markets.”
There are plenty of reasons to believe the surge in corporate debt will continue. Equity’s miserable performance over the last ten years makes it much more expensive than debt, for one thing. And businesses in developing economies are hungry for capital, for another.
Although the article focuses on trading opportunities, debt markets move on a couple of drivers: technicals like changing interest rates and fundamentals like credit quality. After the market seizures of 2008, portfolio managers can’t be so confident they can trade their way out of a poor credit position. That means strong demand for credit analysis at origination and in the after-market.
Corporate loan and bond portfolios did not take the same drubbing as the mortgage-backed markets over the last several years, but doesn’t mean they were risk-free. At the worst, the global default rate on investment-grade bonds was 5.4% in 2009, and on non-investment grade bonds it was 13.0%. Commercial loan delinquencies in the United States were at a 4.5% rate at the end of 2009.
The debt markets got a memorable course of risk-aversion therapy recently, and they’re likely to remain acutely risk-conscious for some time. Regulators doubtless will be especially vigilant about credit risk as well.
Banks, investors, and traders who take credit risk will want to pay close attention to the fundamentals. Analyzing business risk, financial risk, and structural protections may not be glamorous, but it will be more important than ever.