Market players at a default rate session said loan and high-yield default rates are among the lowest in years. "It's so depressing," joked Edward Altman, professor at the Stern School of Business at New York University. "There's just no defaults out there. I have never seen a more benign market." That benign market led to the big question of the afternoon: When will the market turn?
"February 17, 2007," Altman said, joking about when default rates would rise. No one would go out on a limb and attempt to actually predict when this would happen, they only said default rates should rise in the future and it could be as soon as next year. "It's going to happen," Altman said. "[But I] don't know if it's February or even 2007."
Moody's high-yield global speculative-grade default rate ended the third quarter at 1.5%, the fourth lowest level on record since 1985 (CIN, 10/16).
The panel attributed the current low default rates to the excess liquidity flooding the market. "Excess liquidity is coming from Mike Zupon and hedge funds and untraditional lenders," Altman joked. Zupon, head of the U.S. high-yield group at The Carlyle Group and also a panelist, said defaults are caused when companies run out of money and no one will lend them any or they trigger covenants. Right now, most companies are not having trouble finding money and the slew of covenant-lite deals this year has left little room for companies to default.
Howard Tiffen, managing director and portfolio manager at Van Kampen Investments, agreed that the kinds of debt multiples hitting the market will be a problem. "These valuation levels that we're financing are getting to the level where a lot of problems arise with recovery rates," he said. "We're replacing equity with debt and loose covenants provide no warning," he added.