Magazine article Global Finance

Credit Market Crisis Entering New Stage

Magazine article Global Finance

Credit Market Crisis Entering New Stage

Article excerpt

While money market pressures appear to be slowly receding, worries about a possible US recession that could trigger a surge in corporate defaults are moving to the fore for 2008.

"If round one of the current credit crisis has been about the impact on money markets and bank financing, round two looks set to be about the effects on the global economy and the resulting default rates," according to a report by Citi research strategists Matt King in London and Ratul Roy in New York.

Citi's proprietary econometric model, which takes into account a number of macroeconomic and monetary variables, suggests that default rates on speculativegrade corporate debt may increase to 5.5% by the end of this year or early in 2009. A tightening of lending standards is one reason defaults are expected to rise.

Citi's forecast is somewhat higher than that of Moody's Investors Service, which says the global speculative-grade default rate is at its lowest level in 26 years at about 0.9% but is likely to rise to 4.8% by the end of 2008. Moody's says a weakening I economy and a worsening in the ratings mix of speculative-grade issuers are contributing to increases in predicted default rates.

With defaults having remained so low for so long, the anticipated pickup in default rates is obviously of major concern to investors in collateralized loan obligations, or CLOs, according to Citi's "2008 Global Structured Credit Outlook."

"With so much uncertainty out there, investors' outlooks for 2008 seem to run the gamut, from thinking that no form of structured credit will ever again see the light of day to the idea that by the end of the second quarter everything should return to normal," the report says. "Inevitably, we think the truth lies somewhere in between."

Growing demand for emerging markets, commodities, or even foreign-exchange-related structures, may help synthetic volume in 2008 even exceed the total of 2007, the Citi report says. …

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