Are we about to see history repeat itself? That’s been the question on everyone’s lips since the closure last week – or “shuttering”, to use the technical term – of the Third Avenue Focused Credit Fund, one of a number of funds set up to chase yield in a world of poor to non-existent rates of return. Two other smaller US funds have also since taken action to prevent investors removing their money...
Standard & Poor’s recently warned that an astonishing 50pc of US energy junk bonds are at risk of default, or $180bn in total. If we extrapolate this out to the $2 trillion of debt sold globally by energy and mining companies since 2010, the numbers begin to look strikingly similar to the sub-prime mortgage lending that front-ran the financial crisis. Of the $2 trillion of mortgage lending that became distressed, $800bn was sub-prime and $1.2 trillion Alt-A...
To close observers of credit markets, warning signs of a forthcoming high yield bust have been evident for a long time now.
All the old tricks have been present – companies funding special dividends to private equity owners by issuing debt, others issuing more debt just to pay for existing debt service payments, and commission-hungry investment bankers cynically selling the stuff to hapless investors while simultaneously shorting it themselves in anticipation of trouble to come. Many companies that don’t deserve to exist have found it easy to get finance in the one-time scramble for yield.
Is the next financial crisis nigh? Could closure of Third Avenue Fund finally explode the post-crisis asset bubble?
There will be blood.
Never has the need for pristine balance sheets in the oil patch been greater. Ditto for many other resource sectors. The casualty list will be long. Here are some companies which are very close to the lee shore.
http://www.investorvillage.com/uploads/77263/files/OXFORD19CODEBTHITLIST.pdf
In the event that oil and gas prices remain depressed, many companies will be in a very precarious position once their hedges expire. Much of the oil patch will likely go the way of the Spanish Armada ... but with the thankful result that there will be no oil slick.
Expect more North American oil, gas companies to default if price slump continues: Moody’s
My view is that gas and oil prices will rebound ... when and how much is anyone's guess. This presents some great opportunities for those with courage and the long view.
Private equity is starting to circle the weakened companies. I am now looking for listed companies with strong hands.
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