'Corporate Bloodletting' Subsides As Default Rate Returns To Pre-Crisis Levels

Good news for corporations and the people who lend them money: The corporate default rate will likely drop to a pre-crisis level by year's end, according to new Moody's Investors Service analysis.

When Lehman Brothers filed for bankruptcy in September 2008 (the biggest filing in the nation's history), it set off a corporate credit crisis -- what the Wall Street Journal calls "corporate bloodletting" -- that caused massive collateral damage outside the financial world. An improvement in corporate credit could, among other things, help reduce unemployment.

According to the new report, Moody's, one of the three ratings agencies that dominate the market in evaluating corporate creditworthiness, struck 27 names from its list of companies rated at the very low B3 and added only 13 during this year's third quarter, the WSJ reports. The total number of companies on that list, called the "Bottom Rung," is now 195, compared to the high of 288 in June 2009. According to Bloomberg, 19 of those 27 departures were due to ratings upgrades, while the other eight companies were taken off either because their ratings were withdrawn or, as in Blockbuster's case, they defaulted.

The WSJ reports that Moody's says the corporate default rate should fall below 3 percent by the end of the year. To put that in perspective, it was 14.6 percent in November 2009 and 3.1 percent in August 2008, the month before Lehman collapsed. (Moody's senior vice president David Keisman told the WSJ the "rebound is breathtaking.")

As Bloomberg and the WSJ note, the low interest rates set by the U.S. Federal Reserve are partially to thank. Investors looking for high returns have bought risky corporate bonds, thereby strengthening those struggling companies and facilitating a boost in their credit rating.

The larger economy, though, still shows signs of trouble. August saw a record number of Americans lose their homes to foreclosure, even as banks tried to slow the foreclosure process to limit housing inventory on the market. The number of repossessed homes in August -- 95,364 -- was a 25 percent increase from August 2009.

Comments

[jcaunter]

06:17 AM on 09/24/2010

A quote from your article: "The corporate default rate will likely drop to a pre-crisis level by year's end"

An article from HP:

Moody's Under SEC Investigation

NEW YORK — Moody's Investors Service stock fell sharply Monday following news that the ratings company is being investigated for possibly misleading regulators three years ago.

http://www.huffingtonpost.com/2010/05/10/moodys-under-sec-investig_n_571008.html

I could make that standard comment that the guys words you're basing this whole article on are about as trustworthy as pirates, but I don't want to malign pirates unduly so I'll avoid making that comment. It's pretty ridiculous that the MSM and Washington political class keep taking every opportunity to talk up the economy, even as systemic collapse is right around the corner. Whose water are you all trying to carry anyway? The corporate/Wall Street sponsors?

[delta7777]

02:11 PM on 09/23/2010

.
Corporate bloodletting subsides

Main Street bloodletting increases
.

[userw014]

07:40 AM on 09/23/2010

It's been two years - Moody's, the WSJ, et. al. have now had time to learn how to "cook the books" and make a sewer smell sweet.

Other thn we don't have any alternative, why would the ratings agencies or the business and financial press be listened to?

[Chad Wick]

07:21 AM on 09/23/2010

Get information on how to reduce your debt by filing for bankruptcy http://bit.ly/avB0jI

[she343]

11:41 PM on 09/22/2010

why are we still listening to Moody's???

[Reno Fickler]

09:52 PM on 09/22/2010

If BS was corn flakes, you'd run Kelloggs out of business.

[nixrox04]

09:36 PM on 09/22/2010

Why would anyone believe Moody's, they rated sub-prime garbage as triple AAA and helped bring down the house of cards. Many don't think there has near enough bloodletting.

[joungredding]

08:58 PM on 09/22/2010

http://www.huffingtonpost.com/robert-rosenthal/facing-life_b_730966.html

[CH0001]

08:11 PM on 09/22/2010

This is just the eye of the hurricane...

[polaris12]

07:48 PM on 09/22/2010

The question that has yet to be answered (at least I haven't seen an answer) is whether the assault on Lehman was deliberate sandbagging by its competitors to eliminate a rival and thereby have fewer companies dividing the financial pie.

[jcaunter]

06:28 AM on 09/24/2010

Lehman collapsed because of internally generated accounting fraud. The fact that all TBTF banks were and are engaging in it (now with Obama's assistance though) would argue against your theory, for obvious reasons.

Inside Job trailer:

http://www.youtube.com/watch?v=X2DRm5ES-uA

Systemic Wall Street fraud in conjunction with government corruption and complicity were the background causes of Lehman Brother's collapse. JPM and Citi only showed up after Lehman had destroyed it self to take advantage of that fact.

http://www.ritholtz.com/blog/2010/03/did-jpm-and-citi-cause-lehmans-collapse/

[Telemachus]

06:11 PM on 09/22/2010

Alas, the term was only used figuratively.

[ibsteve2u]

05:13 PM on 09/22/2010

"An improvement in corporate credit could, among other things, help reduce unemployment.

Lets see...there's participles...but what do you call a dangling unsubstantiated assertion?

[ibsteve2u]

05:20 PM on 09/22/2010

I.e. why will more credit help, when corporations have stunning amounts of cash on hand:

http://money.cnn.com/2010/08/02/news/economy/corporate_cash_hoarding.fortune/index.htm

[bq]
It isn't for a lack of resources. Non-financial companies in the S&P 500 index reported $837 billion in cash at end of March, a hefty 26% increase over the previous year's $665 billion, according to S&P. These are unusually high levels -- companies are holding cash reflecting 10% of their value today. Since 1999, companies on average held cash equal to 6.6% of their value.
[eq]

There there are the banks, with over a trillion dollars in excess reserves sitting in the Fed earning 0.25% interest from the taxpayer...

I conclude that either there is no consumer demand to drive job creation, or the banks and America's corporations are withholding job creation in order to both extort tax cuts and damage the public perception of Democratic effectiveness.

Me, I lean towards both with heavy emphasis on the latter.

[Telemachus]

06:19 PM on 09/22/2010

F & F.

Also, if you're a member of an increasingly despised ruling elite that produces nothing of value and fears impending social turmoil, rampant inflation, and desertion by your guards and underlings, it makes sense to hoard cash. After all, you may have to outbid your other despised elitist colleagues for the last loaf of bread, or the last seat on the copter leaving the roof.

[switchrat666]

04:03 PM on 09/22/2010

Oh let me guess...now corporations are great