We’ve all read (and heard) a lot recently about the troubles that firms have had raising capital from investment banks as a result of the credit crunch (see M&A Activity on the Decline). It’s quite simple really – with less money coming in as a result of a variety of bad loans, the banks have less money available to go out to their banking clients. We’ve also heard a fair amount about how investment banks have had trouble selling the corporate debt that they’ve already committed to and/or underwritten. Calculated Risk has written much about this, likening these loans to piers. They were supposed to be bridge loans (temporary loans warehoused until they could be sold), but now they have become pier loans (bridges to nowhere, stuck on the banks’ books for an indefinite period of time). Investment banks have had great difficulty selling that paper without steep discounts. In fact, some of that paper is fielding bids at as little as 60-70 cents on the dollar (see Anyone for Used Corporate Debt?). And it’s not just the markets for leveraged loans on the banks’ books that are in retreat, but also the larger market for existing corporate debt (see Watching the Corporate Bond Bubble).

While these stylized facts speak to the difficulty that banks are facing in the current environment, it also presages a forthcoming rash of corporate defaults. To readers of this blog, this information is not new (see Analysts Formally Predict Uptick in Defaults or The Future of Corporate Performance). It should therefore come as no surprise that Ed Altman, the bond guru (and a colleague of mine at Stern), formally predicted a significant increase in defaults (see A Year of Reckoning).

But what I’m trying to get at with all this is that I think that the story of the bond markets is now an old one. Instead, I think it’s time to turn our attention to the next leg down in this cycle – the corporate defaults themselves. We should therefore get used to seeing cases similar to that of Wickes (see Wickes Furniture Files Chapter 11 Bankruptcy – hat tip, Mish). After all, the bond market spreads have been predicting this for awhile now. Buckle your seat belts…

This entry was posted on Friday, February 8th, 2008 at 4:40 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.