Credit Crunch: Will This Time Be For Real? / Richard Berner

Some interesting details what is happening especially at the lower end of the credit quality. Overall Richard Berner is still optimistic that there won´t be a credit crunch in general.(click on headline). But it is clear that the times are getting tougher......And with the junk market being the dominant issuer the last few years i won´t rule out a crunch in the junk market. We have already seen in the subprime market how quick the risk appetite can diminish.

Einige interessante Details was sich insbesondere im riskanteren Kreditbereich abspielt. Da verschlechtern sich einige Parameter doch bedenklich. Insgesamt ist Richerd Berner von Morgan Stanley aber immer noch optimistisch das es keinen Zusammenbruch der Kreditmärkte insgesamt gibt (Überschrift klicken). Klar ist jedoch das wir hier die besten Zeiten gesehen haben. Und wenn man bedenkt wie hoch der Anteil der Junk Finanzierungen in den letzten Jahren gewesen ist würde ich die Möglichkeit einer Kreditklemme in diesem Segment nicht so voreilig ausblenden. Wie schnell die Risikoneigung steigen kann hat man ja gerade im Subprimesegment bewündern können.

Nonetheless, the tails of the credit quality distribution are getting fatter. Look more closely at the high-yield market in the first quarter, and the picture is quite different from the aggregate.

As my colleagues Brian Arsenault and Jocelyn Chu noted recently, the fundamentals were already deteriorating significantly last quarter (see “1Q07 Fundamentals — Got Cash?” June 15, 2007).

• What had been a cash horde has dwindled; cash/debt has fallen a full percentage point over the past year to a below-average level.



• Leverage (debt to EBITDA) rose to 3.64x as debt outpaced earnings for the second quarter on a row. Slower economic growth and fading operating leverage hurt.



• In the high-yield universe, top-line growth has turned negative for the first time since 2002,



• and half the sectors saw margin compression.



• Finally, these companies are reinvesting aggressively in their businesses, with capex budgets rising by 20%. Such expansion augurs further erosion of returns and margin compression.

That deterioration in fundamentals has yet to show up in delinquencies and chargeoffs at banks. They are still close to record lows despite a deceleration in lending, while junk and leveraged-loan default rates are at eight-year lows.

Yet Morgan Stanley bank analyst Betsy Graseck and I agree that corporate credit quality has begun to weaken.

She is expecting chargeoffs to remain flat this year, but loan provisions to rise 30% as falling recoveries spell the end to the long previous improvement in credit quality. For their part, lenders may now back further away from extending credit for buyout deals. In part, that’s because even a slight reduction in market liquidity will make it more difficult for lenders and underwriters efficiently to lay off risk, so lending standards will likely tighten.