Debts 01 - Govt etc (May10 - Oct16)

[winston]

China: Bad Debts

A Fitch report cited risks of bad debts faced by mainland banks.

It said the rapid growth of leverage since 2008 poses significant asset quality risks.

Fitch believes authorities will continue allowing credit to drive growth as they prefer debt restructuring, not mass defaults.

Fitch assumes a non-performing loan ratio of 15 percent to 21 percent in the financial system, resulting in a one-off capital shortfall of 7.4 trillion yuan (HK$8.62 trillion) to 13.6 trillion yuan.

This is equivalent to 11 percent to 20 percent of GDP.

Source: Dr Check, The Standard

[winston]

Corporate Defaults are Already Spiraling out of Control

By Harry S. Dent Jr.

One of the major triggers I’ve been warning about is already happening, even before we understand and/or admit that we are in a recession. Zero Hedge just picked up on an article from Jeff Cox at CNBC.

Global corporate debt now sits at a record $51 trillion and is poised to hit $75 trillion by 2020 – just four years away. If interest rates rise and the economy slows, it will be very hard for companies to roll these bonds over – and then we get what S&P Global Ratings is calling “Crexit.”

The bond markets dry up for corporate lending, especially higher-yield junk bonds. This would set off a chain of corporate defaults and bankruptcies that would cause central banks to start to lose control of the economy, as they did in 2008 forward.

The simplest depiction of where we’re at comes from the chart below:

See larger image

At the worst of the recession in 2009, we saw around 180 total corporate bond or loan defaults. As of the first half of 2016 alone, we just hit 100. That means 200+ by year-end… and we’re just at the beginning of the next financial crisis.

Note that most of the 2009 defaults were in the U.S., as is the case again due to the energy “frackers.” But Europe has a bigger flurry coming this time.

The next chart shows how that crisis is likely to progress:

See larger image

We’re now nearing 5% default rates, as opposed to heights of 16% in 2009. Hence, we have a long way to go here – 300%+ or more, and I fully expect the next crisis to be much deeper than 2008/2009. After hitting $154 billion this year, we will see $100’s of billions of additional defaults in the years ahead.

S&P Global ratings consider a credit market correction inevitable; it’s just a matter of when.

So, how did this occur? It’s another product and cost of ZIRP and QE policies that appear to create something for nothing. Corporations lever up at such low rates and use that money to buy back stock and engineer mergers and acquisitions – all just re-arranging the pie, not growing it.

The entire fracking industry was a hugely bad investment in technologies that were not lower-cost, but higher. Only QE that pumped oil prices back up temporarily, and super-low-cost junk bond financing, made this industry viable. But no longer, with oil at sub $50 for years now… and many more to come, by my estimates.

When the economy slows and/or interest rates rise, to reflect default risks, then we get a negative spiral of more and more defaults. As I predicted, the (ex) frackers are leading this first round of defaults and we’ll see much more to come.

Bondholders and stockholders will lose, employees will lose, companies will disappear and we’ll face a deeper recession from not facing the last debt bubble… that’s the cost: you pathetic, douchebag, academic, never-had-sex-or-run-a-business central bankers!

And don’t even ask about pension funds’ and municipalities’ growing unfunded liabilities, with such low returns on their investments since 2008 and QE. To deal with unfunded pensions, some Chicago homeowners are seeing property tax increases of up to 300%... Holy crap Batman!

So, even homeowners lose with higher taxes and lower property values, as a result.

According to John Mauldin, states like Illinois, Connecticut, New Jersey, Kentucky and Massachusetts are just the first states that will face major defaults, as Puerto Rico is now.

Penalized by low-interest returns, investors will soon see corporate, municipal and even many sovereign bonds depreciate on top of that! Ditto even more for high-dividend stocks that are highly overvalued and that investors have also piled into during QE and ZIRP.

Source: Economy & Markets

[winston]

by behappyalways:-

Why China Can't Solve Its Debt Problem

Source: Bloomberg

http://www.bloomberg.com/view/articles/ ... bt-problem

[winston]

Soaring Debt Has U.S. Companies as Vulnerable to Default as 2008

by Christopher Olsen

U.S. companies have taken on so much debt that they’re at least as vulnerable to defaults and downgrades as they were leading up to the 2008 financial crisis, according to a report by S&P Global Ratings Tuesday.

Source: Bloomberg

http://www.bloomberg.com/news/articles/ ... lt-as-2008

[behappyalways]

When China's Good News on Bad Loans Isn't
https://www.bloomberg.com/gadfly/articl ... oans-isn-t

[behappyalways]

IMF tells China: Fix your debt problem now
http://money.cnn.com/2016/08/12/news/ch ... index.html

[behappyalways]

Italian distressed debt: Bargain hunt

Structural obstacles make Italian banks’ bad loans hard to sell

AFTER years of economic stagnation and questionable lending, bad loans at Italian banks have piled up. The gross value of non-performing loans (NPLs) is around €360 billion ($406 billion), or almost one-fifth of Italian GDP.

Hasty repairs and rescues have been arranged for troubled lenders—notably Monte dei Paschi di Siena, the third-biggest, in July. But what can be done about the loan mountain?

The IMF has suggested building a robust market in NPLs, thus placing the burden of bad loans with distressed-debt specialists, freeing Italian banks to provide more credit to the real economy.

But although the market for bad debts has started to pick up in Italy, with volumes increasing steadily to reach €22 billion so far this year, structural obstacles mean such markets may be less successful than in other European countries.

Distressed-debt investors tend to buy loans in bulk, and hence prefer loans with easily recoverable, tangible collateral. The NPLs of stricken British, Irish and Spanish banks in recent years were largely mortgages: being backed by property, they could be valued from current real-estate prices.

British and Irish courts are also pretty efficient at dealing with claims on collateral. Many Italian NPLs, by contrast, are uncollateralised loans to small businesses or consumers. Even when collateral has been pledged, Italian courts are much slower than those elsewhere to recover it.

Most significant, Spain and Ireland set up “bad banks” a few years ago that used pots of public money to buy NPLs from banks’ balance-sheets and then sold them gradually, creating enough transaction volume for a vibrant market to form. Newly tightened European rules, however, prevent Italy from doing likewise.

Of course, Italian NPLs can still be attractive investments if the prices are low enough. But the gap between banks’ and investors’ valuations is troublesome. Banks have not tended to mark down their loans to any lower than around 40% of their original book value, whereas investors may be willing to pay only 20%. This makes Italian banks even less keen to sell, as it would force them to take a large hit to their already thin capital buffers when selling the duff loans.

Prevented from setting up a bad bank, the Italian government has pinned its hopes on securitisation of NPLs. It has set up a guarantee scheme called GACS for senior tranches of NPL-backed securities. Josh Anderson of PIMCO, an asset manager, reckons that carefully structured transactions could allow NPLs to be transferred from banks’ balance-sheets at something closer to current book value.

However, it is too early to be confident. The GACS scheme has not yet been tested and comes with many strings attached. NPL cashflows may be “too lumpy and unpredictable” to appeal to institutional investors, says David Edmonds of Deloitte, an accounting firm. There are few precedents for securitising NPLs, in Italy or abroad, that provide a useful guide.

Given investors’ reluctance to stump up new capital, transactions that allow banks to thicken their capital cushions through asset sales may provide an alternative. Investors in distressed debt often have private-equity arms too, and have offered to buy businesses from banks to compensate for the capital hit from bad-loan sales.

One firm, Apollo Global Management, recently bought the insurance division of Banca Carige, a regional Italian lender. Loan-servicing units, which pursue individual debtors, are especially appealing targets.

Novel approaches hold promise for both banks and troubled business borrowers. KKR, a large private-equity firm, launched a platform called Pillarstone last autumn that combines NPL resolution with corporate restructuring. Like a buy-out firm, Pillarstone seeks to take control of overindebted, troubled firms and turn them round with new capital from KKR.

The novelty is that it also manages the bank loans of those firms, with the aim of achieving repayment and giving banks part of any extra profits, too.

HIG Bayside Capital, a distressed-debt specialist, recently announced a €260m fund that goes a step further: it both plans to restructure companies burdened by loans and allows banks to sell those loans at current book value in exchange for a stake in the fund. This should improve banks’ capital ratios while diversifying their sources of income. More such creative ideas will surely be needed to sort out Italy’s bad debts.

Source: The Economist

[winston]

China’s Growing Debt Problem Isn’t Quite What It Seems

By Malcolm Scott and Cedric Sam

China’s total debt is now about two and a half times the size of its economy.

It takes almost a third of gross domestic product just to service it.

Corporations are by far the biggest debtors, especially state-owned enterprises.

Source: Bloomberg

http://www.bloomberg.com/graphics/2016- ... 082416_BIZ

[behappyalways]

Digging Into China’s Growing Mountain of Debt
http://www.bloomberg.com/news/articles/ ... in-of-debt

[winston]

Chinese think tank raises alarm over ‘poisonous’ debt, with no quick fixes in sight

Amount owed by governments, firms and people is more than double the nation’s GDP

The amount owed by governments, non-financial businesses and households climbed nearly 11 percentage points over the year to 228 per cent of GDP, or 154 trillion yuan (HK$179 trillion), the National Institution for Finance and Development (NIFD) said in a report on Thursday.

Estimates of China’s leverage ratio vary but there is consensus that the corporate sector, especially bloated state-owned enterprises, are the riskiest borrowers.

Data from the think tank showed the ratio for the non-­financial corporate sector was 131 per cent, with nearly two-thirds of the corporate debt held by SOEs, which have made slower-than-expected progress on reform. “

Source: SCMP

http://www.scmp.com/news/china/economy/ ... -tank-says