Corporate Credit Markets Redux

This morning I attended a Standard and Poors presentation on Emerging Issues in Fixed Income Market. It was extremely well done. The presenters offered some interesting data and insights concerning the health of the corporate bond markets.

Key Takeaways:

• Tighter lending conditions spell heightened risk of defaults
• Two-Thirds (66%) of Non-Financial US Corporate Bonds are Speculative Grade
• A spike in lower grade new issues from 2004 through 2007 will feed default supply
  
• Consumer Discretionary Market Sector is weakest (media/entertainment, consumer products, retail)
• Corporate defaults will escalate in late 2008 through 2009 and will trough in 2010.
• This year’s baseline default rate forecast is 4.7%, with a high of 8.5% and a low of 3.7%
  

What interests me is the degree to which these prognostications may reflect similar default and business distress rates in the small and mid-size business market (SMB). My initial guess is that SMB’s will not experience a similar level of default. I don’t believe that SMB’s are as leveraged as public companies. But credit risk remains a pressing problem for SMB’s and the dramatic curtailment of bank lending heightens default risk.

SMB’s that sell to public companies should take time to study the financial condition of these corporate accounts. Defaults are painful for investors and creditors. Having a large unmet receivable exposure can seriously damage the financial health of an SMB.

I do believe that the forecast for the consumer discretionary sector is very relevant for SMB’s. SMB’s in this sector will not escape the pressures of the economic downturn. High fuel costs, consumer spending capability and inflation will dramatically hurt this sector and may result in increased defaults as the economic slowdown takes hold.

We highly recommend that SMB’s purchase the Profit|Optimizer to mitigate the effects of these risks.

You Tube Video: Louis Jordan, Let the Good Times Roll

Risk: Credit Risk, Corporate Defaults, Consumer Product Market, Small Mid-Size Businesses