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Wall of Worry? No, a Wall of Debt

04/07/2010 1:00 pm EST


Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of Investment Quality Trends, says that just like in 2008, corporations face a liquidity crunch.

In September 2008, a few savvy analysts noted that $871 billion of corporate debt was coming due at year’s end and suggested that with the contraction in the credit markets the prospects for the stock market were dim if the maturing debt could not be rolled into new debt. In retrospect that was a great call, as evidenced by the waterfall sell-off in equities through the October/November 2008 period.

In similar fashion a new mountain of debt is building. By example, $700 billion of risky, high-yield debt is looming on the horizon and as one analyst recently wrote, “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this.”

To be sure, more attention is being paid to sovereign debt than corporate debt as the problems in the PIIG [Portugal, Italy, Ireland, Greece] sovereigns are blared across the headlines each day. While the Street may be more sanguine about corporate than sovereign debt, it doesn’t negate the fact that the life blood of corporations is liquidity. If the ability to access liquidity is hampered, there is no better timing mechanism in terms of equity market downturns.

While stock market bulls have enjoyed the last 12 months in the sun, the fact remains that at some point the music will stop and this mountain of debt will either have to be retired or rolled over. With sovereign debt sucking all of the oxygen out of the room, it begs the question: Will there be enough liquidity to go around and soak up all of the supply?

With the [Federal Reserve] dispensing its elixir and the markets giddy with glee, it should not be forgotten that reality, as it were, has the propensity to bite. That Wall Street bulls seemingly see no end in sight should be sufficient cause to pause, but intoxication is generally lamented only after the effects have worn off.

At the risk of exhibiting poor form, sobriety could come quicker than anticipated if real job growth, not the temporary kind created by the government in the form of census workers, does not materialize—and soon.

Also, as ten-year Treasury yields draw ever closer to 4.0% and 30-year bonds towards 5.0%, it is only logical to assume that eventually mortgage rates will follow suit, which could put quite a damper on the hopes for a rebound in the housing market.

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