Start Finance Igor Strehl – Bonds and the risk of the Corona crisis

Igor Strehl – Bonds and the risk of the Corona crisis

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General he coronavirus crisis has triggered shock waves in the global financial markets.

While the focus so far has mainly been on the collapse of the equity markets, the damage to credit markets and bonds could ultimately prove to be more significant for corporate issuers and increase the risk of companies going bust.

Effects of CoronaBonds and other financing options are affected by the crisis in two ways: The coronavirus has burst investments or other loans that have built up since the global financial crisis. Second, it is the direct cause of a change in consumer behavior that will lead to an unprecedented decline in corporate profits and increase the risk of bankruptcy.

While the burst bubble may only have corrected credit and bond deals, the collapse in consumer demand is likely to cause a credit crunch for many borrowers. Most worryingly, it is not clear who can solve it.Corporate credit markets were shaky even before the outbreak, largely due to record growth in corporate credit and bonds in Europe and around the world.

The tremendous increase in leverage was system-wide and particularly pervasive in market segments that were already in debt.Example USA:In the US, the uninvestment grade leveraged loan market has more than doubled since 2007 to $ 1.3 trillion, while the US dollar denominated high yield bond market has more than doubled by over 65% to 1.6 Trillion US dollars.

The largest and fastest growing area was the lowest rated BBB segment, the size of which quadrupled per S&P Dow Jones indices over the same period.Possible causesEqually worrying were the tendencies towards looser restrictions on borrowers and deterioration in the quality of earnings.

Apparently, most of the leveraged loan market has forgotten as more than 75% of leveraged loans issued in the past two years do not have the same per LCD requirement. Additionally, lenders have increasingly been willing to give businesses the chance to grow their cash flow numbers.For months, experts have been warning that corporate loans are particularly vulnerable to corrections.

The fears of financial experts will soon materialize. Since February 20, high yield markets have declined 16% and 14% respectively as the market began to reassess risk. They experts estimate that these losses can and will get worse.In addition to acting as a catalyst for a credit crunch, the coronavirus pandemic is having a profound negative impact on the economy.Perhaps even more worrying is the indefinite length of time the crisis will last. Nobody really knows how long home protective measures will be required.

The combination of catastrophic earnings and uncertainty is likely to drive up risk premiums for investors and make capital even more expensive in the bond markets. If the lenders pull out at a loss, the credit correction will be very high.What is the state doing?Governments and central banks have announced massive stimulus packages, including extensive loan programs to empower corporate borrowers. These programs are both justified and impressive, and the markets have responded positively.

However, these extensive loan programs do not directly benefit non-investment grade issuers, which alone account for nearly 300 billion euros in bonds and loans. In particular, the issuance of investment grade debt securities last week set a record, while the issuance of high yield bonds totaled EUR 0.Financial experts welcome fiscal and monetary stimulus, but must acknowledge that those in the lower tiers of corporate lending may not, or barely, benefit from these measures.It will lead to a sharp increase in the number of failures. This will impact billions of euros in loans, including both uninvestment-grade companies and the large number of issuers that have been downgraded due to the coronavirus crisis.

Private capital could fill that void, but with risk premiums expected to rise, the price will be high. And so a spiral of default will persist in high-yield bond and leveraged loans as these companies do not have access to liquidity to avert defaults.ConclusionWe are currently at the beginning of a global pandemic that will affect us socially, economically and financially