Dr. Altman presented an interesting perspective on economic conditions in 2009- backed with the kind of data and research that gets you thinking critically at the economic data you see around you.
Some quick notes on topics touched upon:
1> The High Yield Bond OAS (yield to maturity spreads over treasuries), which were at 260 bps in June 2007, had jumped to 2046 bps in December 2008.
2> Spread index creation, based on weighted averages of spreads, and dropping of companies that go bankrupt, reduces the spreads.
3> Default rates could be a leading indicator of the health of corporate bond market, however, CDS does not define a distress exchange as a default event.
4> The size of the distress debt market, compared to that of the high yield debt market is an interesting economic trend.
5> Hedge funds will find it difficult to make money as the default rate rises.
6> Moody’s downgrade of 50% of CLOs in the $100 billion market is based on a 40% recovery rate on defaults.
7> In 2009, more than 12 companies went bankrupt with over 1 billion in liabilities.
8> Distressed exchange market in 2008 more in value than the the bond market since 1984 (IBM issuance of the convertible bond to finance an acquistion).
Points to note about the credit markets trends:
1> Low equity and debt volatility till summer 07. The VIX fell to 10.
2> Low default rates and high recoveries.
3> Distress debt control investing- loan to own.
4> Rescue financing- essentially a privatization of bankruptcy.
5> Volatility a measure of downside distribution of asset values.
6> Now, volatility high and liquidity low.
What patterns do you see?
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