It takes time for the financial pressures to manifest in a world overloaded with debt. Beneath the surface the pressures of rising interest rates spread out via cracks and fissures. They traverse the subterranean far and wide, undetected by the unassuming eye, as they seek out places of weakness.
These are the places where breakages occur.
This week the Wall Street Journal reported several findings from a recent investigation. A critical place of weakness, they discovered, is American businesses:
“North American companies will have to come up with at least $200 billion in 2022 and 2023 to cover rising interest expenses, according to a Wall Street Journal analysis of data from Fitch Ratings of the companies it rates. Borrowing costs could remain elevated for years if high inflation persists, splitting American corporations into two camps: those that can cut debt and survive on their own earnings, and those that can’t.”
Rising interest rates, no doubt, bring death to zombies. By zombies, we’re referring to those companies in the second camp that would have died long ago, if not for the sustenance of artificially suppressed cheap credit.
These zombies – like Washington Mutual, Ringling Bros, Toys R Us, and many other past zombies that did not survive the last down cycle – will soon vanish from the face of the earth forever. Here’s why, again from the WSJ:
“Funding of investment vehicles called collateralized loan obligations plummeted 97 percent from last year’s levels to $1.3 billion […]. CLOs are the biggest buyers of junk-rated corporate loans that private-equity firms use to buy target companies, and the flow of those loans declined by about 70 percent this October to $54 billion.
“The pain on Wall Street reverberates on Main Street. Private-equity firms did about $1 trillion of deals last year, penetrating even niche industries, such as car washes, and the cost of the loans those companies borrow rises in lockstep with interest rates. When private-equity funds turn less profitable, that hits U.S. pension funds, which increasingly rely on the asset class and are facing big losses in public stock and bond markets.”
In short, business credit for zombie companies has evaporated. At this point, even if the Fed could pivot (which it can’t) it would be too late. The damage has been done.
As night follows day. And day follows night. Big time defaults are coming. Moreover, the bear market’s not over…not by a long shot.
You can take that to the bank.
Death To Zombies?
They are already DEAD!......................😜