S&P reports the largest gap in defaults in months. Meanwhile, corporate borrowing continues its steady growth.
It’s no secret that with interest rates so low there are few places for corporations to invest their cash. That’s why cash managers might be tempted to start chasing better returns in the high-yield debt market. Although many advisors or boards would recommend against this, it’s still nice to know that fewer and fewer companies are defaulting on their debt. This is likely why investors have been keen to continue snatching up that debt and why banks have been eager to lend.
Standard & Poor’s Global Fixed Income Research reports that only three issuers have defaulted in 2011, and that none have defaulted in the past four weeks. This is the longest gap since 2007, when there were no defaults for six weeks, S&P GFIR said. At the same time, the Equipment Leasing and Finance Association (ELFA) reports that US companies originated $4.1bn in loans, leases and lines of credit in February. This is a bit below January’s $4.2bn total and far below December’s $9bn, ELFA said, but still up 28 percent from the same period last year.
Fewer non-paymentsOverall, the leverage market has been booming for the past several months, with investors rushing into bets by financing riskier companies. And the outlook remains bright: lower loan default rates are expected to continue over the next two years, according to a quarterly straw poll of loan managers by S&P’s Leveraged Commentary and Data.
For its part, S&P GFIR reports that only three issuers – Sbarro, US-based Ahern Rentals, and Czech Republic-based lottery company SAZKA – have skipped coupons payments so far in 2011, compared to a year ago, when 22 global corporate issuers did so.
This is overall good news for those venturing into the high-yield market. But there are still risks, LCD notes, particularly as it relates to geopolitical problems, which lately have been driving up oil prices. Also, according to the ELFA data, delinquencies are rising: up to 3.1 percent of borrowers were delinquent 30 days or more in February, an increase from 2.8 percent in January but much improved from the period a year ago. Likewise, charge-offs also increased slightly in the month, according to ELFA, but still was a “dramatic improvement” over the same period in 2010.
The ELFA data shows that there are “reasons to be optimistic about the equipment finance sector as the economy slowly recovers and the demand side of the capital investment equation picks up steam,” ELFA President and CEO William G. Sutton, CAE, said in a statement.