Tuesday, February 14, 2012

DB's scary default risk scenario

Deutschebank is predicting a potentially scary scenario with respect to the US non-investment grade corporate default rates. Their forecast shows three cases: base, optimistic, and pessimistic. Surprisingly the optimistic and the base cases are nearly identical, with default rates of around 2.5% - close to historical lows. The justification is the relatively low leverage for non-investment grade firms, high liquidity positions, and a market that is hungry for "yieldy" paper. But the pessimistic scenario that assumes a material downturn in the US economy (likely driven by Europe) us quite grim, pushing toward an 8% default rate in 2013. This basically assumes that any refinancing opportunities for these companies have been shut down as they were in 2008.

Non-investment grade default rate forecast (source: Deutschebank)

In such a scenario, the equity markets would hit new recent lows and the unemployment rate will go back to the 09 levels. DB is not assigning a probability to these scenarios - nevertheless this pessimistic outcome is quite unsettling.
Related Posts Plugin for WordPress, Blogger...
Bookmark this post:
Share on StockTwits