What to Make of the Credit Cycle (Part 1)

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Moody's, Fitch & Guggenheim Partners Chime In

Earlier this week, Moody’s Default and Ratings Analytics team forecasted that the US’ trailing 12-month high-yield default rate will sink to 2% — from its February 2018 3.6% level — by February 2019. That is not a good sign for restructuring professionals itching for an uptick in activity.

FitchRatings chimed in as well, noting that underwriting standards underscore that the leveraged debt market is in the later stages of the credit cycle. But, it added,

“Aggressive documentation terms now prevalent could challenge recoveries in the next downturn. However, a surge in refinancing activity since 2016 should increase time between the credit cycle's bottom and peak in default rates. Looser documentation, such as the prevalence of covenant-lite (cov-lite) loans, should also lower the risk of technical default while enabling issuers to access additional funding via secured debt and unrestricted subsidiary provisions.” (emphasis ours)

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Is New York City F*cked? Part II.

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We previously expressed our concern about the New York City Mayor Bill de Blasio's plan for tackling disruption. The gist was that the Mayor's budget fails to take into account the effect of Uber and Lyft on taxi medallion values. To add insult to injury, this American Council for Capital Formation report makes it sound like the City's pension funds are being managed in a way that would make even Bill Ackman look good. Choice quote: "The performance of the New York City Pension Funds over the past decade has not kept pace with what is needed to stay solvent over the long term. Unfortunately, even conservative estimates project unfunded liabilities to be in excess of $56 billion. It is therefore extremely concerning that managers are spending dwindling resources on investments that are socially or politically motivated, rather than based on performance." The report paints a pretty gnarly picture of how New York City Comptroller Scott Stringer has handled pensions, notwithstanding the funds' recent market-based improvement. Distressed investing fans will particularly love this bit: "For example, the New York City pension funds paid $2.1 million in fees to Perry Capital in fiscal 2016, and had $129 million invested in the firm when it shut down its flagship fund in September 2016 after losing money for three consecutive years. The cumulative return of the city’s pension funds’ investments in Perry Capital inception to date was -14 percent, as of September 2016." Riiiiiiiight. 

As we said before, color us concerned.