The financial markets were forced to absorb news that came from the rating agencies today. Even though the stock markets look as though they may have found a bottom, temporary or not, the credit market still has some downside risks.
Standard & Poor’s (S&P) announced that leveraged buyout defaults might reach 15% in Europe this year. Leveraged buyouts, or LBO’s, are complex financial instruments where a company borrows money (the lever) to acquire a rival company. The assets of the acquired company are used as collateral for the loan. According to S&P’s projections, approximately 100 companies might default this year, from which most are companies that issued LBOs.
TheLFB-Forex.com Trade Team notes that the forecasted 15% default rate is a record high, beating the 2001 downturn. “Credit markets are still suffering from the current crisis, and this is reflected in the number of companies expected to default later this year.” TheLFB-Forex.com Trade Team said. “To make matters worse, governments are issuing huge amounts of debt to fund their stimulus packages, something that increases the spread between the corporate and government credit costs”
“According to the latest data coming from the corporate debt market, the overall quality dropped to the lowest level seen over the last few decades,” TheLFB-Forex.com Trade Team added. “The number of companies that saw their rating downgraded reached 13.8% in 2009, while only 0.5% companies saw their debt upgraded. Taking into account the rising wave of unemployment, and the declines experienced in consumer spending, it’s not hard to see this trend continuing over the next quarter.”