Edward Altman, the leading authority on bankruptcy theory and the creator of the widely-used Altman Z-Score, was the keynote speaker at today’s Turnaround Management Association luncheon in New York City.Business Insider was in attendance as he laid out his 2012 outlook for corporate and sovereign debt markets.
On Corporate Debt
Corporate debt default rates should tick up in 2012, but they will be nowhere near the highs of 2009.
Altman said he expected 4.28% of high-yield debt to default in 2012, up from 1.32% in 2011.
Kodak’s recent default was a start, but there’s still a long ways to got to meet Altman’s forecast.
On Sovereign Credit
Altman noted that plenty of attention is being paid to classic measures of sovereign credit risk including debt-to-GDP, deficit-to-GDP, and other economic measures including productivity, trade, and labour.
However, he warned that there isn’t enough emphasis on the health of the private sector, which is where government revenue comes from. “So goes private sector debt, so goes sovereign debt,” he said.
Altman believes that Mario Monti is the right man to be at the helm. Monti has emphasised the need for economic growth.
However, Altman notes that growth is unlikely given austerity. “You’re cutting your own throat.”
Altman is also weary of Silvio Berlusconi. “Don’t count him out,” Altman warned. “If he comes back, count Italy out.”
Greece’s prospects aren’t looking too bright. Based on the “economics of the situation, there’s no question they’re insolvent and they will default.”
Greece could possibly avoid default if private creditors could come to some sort of agreement on a debt swap. But in order for Greece to avoid default based on the ISDA’s definition, there must be 100% consensus on the terms of the swap. And Altman believes that is unlikely.
However, he hopes that an exchange will work because “the alternative is chaos.”
On Credit Default Swap Spreads
Many have called into question the value of CDS spreads as a proxy for sovereign default risk.
Altman agrees that CDS are not perfect signals. But he also noted that they have remained pretty steady at high levels despite fleeting rumours and headlines.
On Low Interest Rates
Defaults will rise if bad firms continuously get cheap financing. Back in 2007, banks were rushing to lend to junk borrowers. And it’s happening again. Altman warns this is a “troubling signal.”
Key Risks In 2012
- The Real Economy – Primarily the risk of a U.S. recession
- Contagion Between Markets – Debt and Equity
- Sovereign Debt Crisis – Europe
- Maturity Schedule On Private and Public Debt
- Financial Insitutions Systemic Risk
- U.S. Municipal Bond & Federal Government Default
- Uncertainties – non-quanifiable (eg. war)