NY Times: Deteriorating Corporate Credit Ratings

Submitted by
CalculatedRisk on Fri, 11/10/2006 - 9:29pm (22 comments)
Russ Winter wrote on Fri, 11/10/2006 - 10:35 pm

Credit Spread Smoking Guns:
Winter (Economic and Market) Watch » Credit Spread Smoking Guns

arbogast wrote on Fri, 11/10/2006 - 11:04 pm

Ponzi scheme?

Anonymous wrote on Fri, 11/10/2006 - 11:30 pm

it's part of the global search for alpha.

Tanta wrote on Sat, 11/11/2006 - 2:34 am

. . . and the global discovery of delta.

Tanta wrote on Sat, 11/11/2006 - 2:38 am

Actually, I'm pretty sure the globe on aggregate has encountered delta before. It's just when you read the NYT's peculiar tone of mildly outraged innocence that you get the idea that it's a new concept for some folks.

CR, did you ever get a response regarding last week's bit of Times goofery?

Professor Foland wrote on Sat, 11/11/2006 - 5:18 am

The numbers given are by company; are they any different if looked at by dollar volume of the issues? I.e., do the numbers look this way because there are more and more small companies issuing low-grade; or is the phenomenon more or less evenly distributed among company sizes?

Vega wrote on Sat, 11/11/2006 - 5:24 am

...and I'm sure the globe has some sort of hazy recollection of what it means to be SHORT GAMMA out the wazoo, because that's what the Street and Banks and B/Ds and Hedgies all are today. They are short so much volatility it is mindboggling. Short vol in options, and short vol via being long bonds / credit (long bonds is like being short wayyyyyyyyy downside equity puts). Think that downside skew is being priced right given the GLOBAL real estate slowdown and the GLOBAL real estate imbalances and the GLOBAL willingness to have the same trade on as everyone else? HAHAHAHAHAHAHA.

Just wait. LTCM blew $1.5B being short SPX vol/gamma. Goldman London lost $100mm in May and June this year with the same posy. Amaranth lost the same, too, actually a little less. The European banks are so giddy to be short paper/vol that it's disgusting. They are, in fact, utterly smug about it.

It'll work until it doesn't work. And trust me, I LOVE to sell paper. But now is the worst time to sell it.

If anyone gets a copy of S&P's report: The US 25 Year Slide To Junk, post it if you can. It just assigns some #s to the data in CR's post today. In short junk companies have gone from 28% of the S&P ratings universe in 1996 to 49% today. Strip out the financials and junk companies are now 61% of the S&P ratings universe. And I wonder why the financials look so good? HA.

Thanks CR for a great post.

calmo wrote on Sat, 11/11/2006 - 6:11 am

Such an odd expression "read the tone". The next thread which shows Toll Bros CEO interjecting on the Hovnanian CEO is an unmoderated exchange but the tone is not left to the live audience to interpret for us. No, the lady rams it (seriously, how long could you listen to her earnest-times-ten tone?) down our throats: this was a testy exchange where Robert Toll "was certainly not happy". [I'm here to reguritate any and all tones for my listening audience who might be suffering from varying degrees of tone deafness, you? Are you in charge of your toniness? Do you trust your ears or are you going to let someone paste it to you?]
The message sometimes cannot be stated simply because the audience is not prepared. [Cats are a notoriously unprepared audience compared to dogs, say, who generally are always willing to play fetch no matter what fancy pants trick you are trying to get them to learn.]
The tone is the growl or purr that mere words are trying to subdue --this has been one of those humbling trys I bet.
Credit creation, the financial instrument that is mitigating all risks under all those fancy pants acronyms does seem to be frightfully undefaultable. (And so removed from those cromagnons actually building something.)[And so profitable for a few CEOs who make an occasional appearance to reassure their stockholders.]

ac wrote on Sat, 11/11/2006 - 8:06 am

If you have a prescription for Barron's this article, on the same subject, is kind of interesting:

http://online.barrons.com/article/SB116311596629719216.html?mod=9_0001_b_online_exclusives_weekend

Citing research done at the Federal Reserve Bank of New York points out this inverse relationship between growth and defaults isn't linear. Credit problems seem to step off a cliff when GDP growth drops below 2%, according to the study.

When the year-on-year change in GDP is 2% or greater, the default rate was 3.96%. But when growth was less than 2%, the default rate jumped to 9.62%, according to Fridson's research.

Tanta wrote on Sat, 11/11/2006 - 8:44 am

A prescription for Barron's? ac, that's the kind of sick joke I'd make.

I gave up my Barron's subscription in last year's consumer retrenchment. I miss my Alan Abelson fix.

CalculatedRisk wrote on Sat, 11/11/2006 - 2:51 pm

Tanta, Yes, I received an email from the NY Times. On Friday the Times forwarded my email to the economist that provided the writer with the data.

I suspect to hear something more next week - I'll post their response when I hear something.

Best Wishes

Banker wrote on Sat, 11/11/2006 - 2:59 pm

The article misses the point, as the NYT often does. Our economy is more dynamic, and therefore the outcomes for companies are more volatile, than ever. The fact that first time rated companies are below investment grade isn't, for the most part, because they are highly leveraged. Instead it is because those companies have a high degree of business risk. 20 years ago, those companies only had access to the bank, private placement and equity markets and never even approached the rating agenicies. Today, they have access to the public debt markets, convert market in addition to the old options. This is a very, very good thing if you value a dynamic economy.

bob wrote on Sat, 11/11/2006 - 5:32 pm

It's a migic of those days - abundance of liquidity and relatively low inflation.

It can't go on forever. One day either liquidity will have to shrink or inflation go up.

I think we get too much of helping hand from other nations with supplying cheap goods and labor for outsoursing

SteveB wrote on Sat, 11/11/2006 - 6:52 pm

It seems clear, as the NY Times notes, that the world is awash in liquidity. My question is, why is there so much more liquidity in the world than in the past? I have read that it is due to low interest rates, but it is not clear why these low rates lead to an increase in total available funds for investing.

Bill Conerly wrote on Sat, 11/11/2006 - 7:07 pm

The better way to gauge the health of corporate America is through the Fed's flow of funds data. You can look at balance sheet data. I haven't looked in a couple of quarters, but through 2006q1, debt/equity ratios werre down significantly from a few years ago. I've got a chart on my blog, businomics.typepad.com

dryfly wrote on Sat, 11/11/2006 - 8:40 pm

I haven't looked in a couple of quarters, but through 2006q1, debt/equity ratios werre down significantly from a few years ago.

First point is that I would sure HOPE they have better debt/equity rations now than 'a few years ago'... we've seen near record earnings the last few years. A few years before that we were in recession.

In fact it begs the question given the earnings why do they have debt at all right now?

Secondly debt/equity is a very murky metric... What 'debt'? What 'equity'?

Acid ratio - immediate debt burden vs liquid assets available to cover immediate debt burden & expenses - is a far better gage of business solvency & debt quality.

Companies rarely default because their balance sheet looks crappy - they default because they don't have the cash needed to cover immediate expenses (including current debt obligation).

And if their asset quality overall is suspect then they can't easily borrow long to cover the short term needs.

When I was working on my masters I took a class they called 'Profitability'... we looked at these things. One of the most important 'metrics' we calculated was 'bankable equity' - those assets a company has that can be used as collateral to borrow against. The formula was:

Total Assets
minus Liabilities
minus Intangible Assets
minus 1/2 of Inventory Valuation
= Bankable Equity

Use that number as a basis in your debt/equity ratios and you get a very different picture.

donna wrote on Sun, 11/12/2006 - 12:29 pm

Helicopter Ben.

We were warned....

David Sternfeld wrote on Sun, 11/12/2006 - 10:14 pm

Here's my chicken vs. egg progression question: Will exiting speculators stopping-out or marginal defaulters caving collateral prices or capital ratio limited lenders precipitate more widespread deflation? And - pushing the foul metaphor further - whose chicken gets run over first crossing the superhighway to the past (the 1930s)?

Bob_in_MA wrote on Mon, 11/13/2006 - 7:41 am

There's a video clip on Bloomberg of an inteview with Wilbur Ross who basicly gives the same argument as the Times article (it's on this page.) He's set up a big fund with Goldman Sachs to start searching for bankrupt companies as buyout canidates.

Ross sees a lot more pain among auto suppliers, pointing ourt that manufacturing volume has yet to fall a whole lot.

In the Barron's column AC links to, Forsyth also talks about bonds where the interest is given in payments in kind, which means they can pay the interest with more bonds. Apparently these had faded from use but are back. Forsyth compares them to option ARMs.

Doesn't sound like Japanese banking practices before their big bust? I heard that it was essentially impossible for a business to go bankrupt because the banks would always extend more credit.

Bob_in_MA wrote on Mon, 11/13/2006 - 7:41 am

Urg, sorry about that.

Tanta wrote on Mon, 11/13/2006 - 8:59 am

David Sternfeld, you reminded me of my favorite fowl joke:

Q: Why did the punk rocker cross the road?
A: It was stapled to the chicken.

It doesn't matter which chicken waddles out into traffic first, since we're all stapled to it one way or another.

rpeglm wrote on Sun, 9/2/2007 - 4:07 am

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