«When the Night is darkest the Dawn is nearest.»
Visual Finance today revised its Credit Risk Outlook from the highest
Credit Risk Level ‘Red’ (March 31st, 2006 until February 24th,
2009) down to ‘Orange’. We were among the very few researchers
worldwide that have warned investors at an early stage of the crisis.
Meanwhile the inherent investment risks have become visible for everyone.
We assume that the end of the financial market turmoil is within reach
and that the economy could recover noticeably by the end of 2009: This
is the result of our In-depth study of the most severe financial disasters
in the last 170 years and our assessment of the present meltdown. According
to our scenario the peak of corporate defaults i.e. insolvencies will
be reached within the next 18 months. For the time being the appropriate
design of an intelligent credit strategy will be the most important key
driver to investment success. For more details please read the information
Barclays US High Yield Corporate Bond Index versus
Barclays US Treasury Index
Bond Default Rate (Issuer weighted)
Decisive extraordinary efforts will step-by-step help to stimulate the economy by attracting buyers into the market places: That could lead to, what Visual Finance calls, an almost ‘Spontaneous Recovery’.
But all the assistances mentioned cannot stop at the beginning the corporate
default rates (rate of insolvencies) from rising further over the next
months during the period of corporate reorganization (downsizing), which
is accompanied by an extreme risk aversion of private and institutional
The global credit rating trend remains negative and we do not expect
a trend reversal in the near term: Many corporate credit profiles will
stay vulnerable for a while. It will take nearly two years for rating
upgrades to outstrip rating downgrades again. In particular Visual Finance
predicts huge debt restructuring programs in number & size
The almost unprecedented situation may require relief from all corporate stakeholders. The decision whether it makes sense or not to make concessions in contracts to secure a sustainable survival must be felt on a case-by-case basis by the stakeholder groups involved. The fruits of reorganization and New Deals will tighten the record high credit spreads over a time period of 18 months. Furthermore, we expect the number and volume of corporate finance transactions to increase substantially, especially for mergers, acquisitions, spin-offs, capital increases and bond issuances (more time is needed for a demand-driven rise in IPOs).
The stock market valuation is now moderate with price-earning-ratios at around 10x for many major stock markets. Visual Finance has identified some excellent corporate recovery situations i.e. turnaround stories with some extremely attractive stock & bond price valuations. In our recovery forecast scenario the government bond yields will rise substantially over a medium-term horizon, while, as mentioned before, the credit spreads of corporate bonds will fall from these not sustainable high levels. Some global imbalances are to persist while others will be diminished by the crisis.
A secular credit risk migration from corporates to governments (sovereigns/states/locals) is foreseeable in many countries when taken into consideration the flurry of government bailouts and the severity of the economic downturn. The growing budget deficits and the rising debt burdens will constitute a heavy burden for (the next) generations.
Photo Island by Ruedi Giezendanner, Winterthur
Visual Finance - The Power of Arguments