Monday, November 25, 2013

FLASH UPDATE: WILMAAAAAA, The High Yield Models are BROKEN!



It is very clear that the models used to determine the ability of a HY company to repay its debts are severely broken.  There have been many instances of incorrect recommendations made based on historical data and criteria.  In numerous cases, a Buy or Hold recommendation was just wrong.  (See the case study on Mirabela Mining Ltd. that we are putting out this week on our blog.  The bonds were still trading at par earlier this year after the equity had fallen 93%! The company is now in bankruptcy.  Clearly someone’s model was wrong.) 

As in the late stages of the housing boom, underwriting standards in the corporate credit markets have loosened as the offer continues to get lifted at higher prices for CCC credits.  Today more than 50% of the new issuance for senior bank debt is cov-lite, approximately double what we saw in the previous cycle’s peak (2007).  In such a lax underwriting environment, with high yield issuance near record highs and spreads near all-time tights, the only question that remains is ‘When?’   When the liquidity stops (or even as it “Tapers”), the weak underwriting and excessive leverage in “specific” HY companies (150-200) will force a wave of defaults, potentially larger than the normal 50% ratio.  We have a structure in place that allows us to wait for the music to stop. 

Tradex Global Advisory Services, LLC
investorrelations@thetradexgroup.com 
203-863-1500
@Tradex_Global

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