The Accelerating ‘Junk Debt Crash’

Vulture investor and former Rothschild banker Wilbur Ross, in an interview with CNBC-TV Dec. 15, warned of a “wall of maturities of junk debt,” and said the junk bond is putting pressure on higher-quality corporate debt in a “daisy chain” that started from the energy sector.

Ross said: “There are no bids for the energy bonds…So if you have a liquidity need, you’ve got to sell something that there’s a bid for. That’s starting to bring down the rest of the market.” As for the junk debtors, Ross estimated they have $1.4 trillion in debt coming due and few or no options for refinancing it, especially with the Fed raising rates.

The “junk debt crash” was scarcely discussed two months ago, and has suddenly accelerated. As recently as Sept. 1 the default rate in “high-yield” corporate debt was still just about 2%; now, according to Thompson Reuters, it has quickly gone to 5%, and for energy/mining and metals companies, to 12%. To take one company, Chesapeake Oil, based in Oklahoma City, as an example, its bonds on Sept. 1 were valued at 80 cents/dollar; now they are in the 35-cent range; its stock has gone from $60 to $5; it could go any time. And Chesapeake, after only Exxon Mobil, is the largest oil producer in the United States.

The Office of Financial Research (of the U.S. Treasury) issued a financial stability report, which said distress in the junk-bond market could spread to other parts of the financial system. “Credit risks are elevated and rising for U.S. non-financial businesses and in many emerging markets. In the United States, non-financial business debt is growing rapidly, boosting leverage; in relation to GDP, it is at a historically elevated level.”

That is an understatement of the corporate debt bubble. The median ratio of gross debt to earnings for the largest 1,000 non-financial companies is 2.2 for the 12 months through Sept. 30, 2015, according to an analysis by Fortuna Advisors LLC. This figure is 47% higher than it was in September 2007, the bubble year before the bank crash, when the median ratio was 1.5. A wildfire of mergers and acquisitions this year has been valued at nearly $5 trillion, the highest since the 2007 merger wave, and has added nearly $3 trillion to corporate debt.

The U.S. industrial economy continues to sag under this debt burden. The Commerce Department today reported that U.S. industrial production dropped by a large 0.6% from October to November; and now, industrial production is down for the year as well, by 1.2%. Industrial capacity utilization fell to 77.0% from 77.5%. Drilling of oil and gas wells is at the lowest level since 1999.