NEW YORK ( TheStreet) -- Wall Street scavengers looking to pick up bankrupt U.S. companies for pennies on the dollar may begin to see their luck start to turn in 2012. Risky companies that were able to borrow money from investors in record amounts -- and at record low rates -- over the past several years will be abruptly cut off as the European debt crisis escalates and a pile of risky debts start coming due in 2012.
Early in the financial crisis default rates among speculative borrowers spiked to nearly 15% in 2009, and many expected bankruptcies to increase. But defaults fell dramatically in 2010 and 2011 as over a trillion dollars was extended to risky companies. In the first two months of 2011, no sub-investment grade company defaulted -- through November thirty bankruptcies this year are far lower than 2010. However, the recent defaults of MF Global, American Airlines ( AMR) and General Maritime, among others signal a potentially developing bankruptcy trend. Previously refinanced bonds, along with a stock of risky buyout debt used in company takeovers are going to begin coming due in 2012, just as investors shows risk fatigue. If the trend continues, defaults will follow. Industries like media, gaming, entertainment and oil services are most vulnerable going into 2012, according to a December report from Standard & Poor's. S&P classified risky industries as having a high proportion of companies rated junk, ratings held with negative outlooks or if company bonds traded 10% above U.S. Treasury benchmarks. Within those industries, S&P ratings director Diane Vazza highlights Boyd Gaming ( BYD), Orbitz Worldwide ( OWW), The McClatchy Company ( MNI), Dex One ( DEXO), Rite Aid ( RAD), Supervalu ( SVU), Quicksilver Resources ( KWK) and private equity owned companies such as Clear Channel Communications, Energy Future Holdings, Realogy and Caesars Entertainment as some companies that may face headwinds. Issues for companies vary, however unlike in recent years, high debt loads could become less manageable if fearful investors take cover from the over trillion dollars of risky debt that is coming due starting in 2012. With the help of investment banks issuing bonds to yield hungry bond investors, "companies have kicked the can down the road since 2008. That road is coming to an end," says Jeff Marwil a partner at law firm Proskauer and co-head of its bankruptcy and restructuring practice. Currently, $266 billion of risky high yield bonds and loans are set to come due in 2012, nearly 25% of the overall one trillion plus high yield debt market, according to calculations from Fitch.
The market to refinance that debt may not be as bullish as it was in past years and even in the first half of 2011. "The high yield market bailed out the maturity wall that existed in 2008 and 2009. I don't think it's going to be there in 2012," adds Marwil. Those problems may not seem so apparent, but that's because accessing credit was easy in past years. After setting a record for high-yield debt issuance in 2010 with $252 billion raised and a strong first half where $146 billion of risky debt was issues, investors are beginning to lose their appetite for risk. Only $22 billion of high-yield bonds were sold in the third quarter, the lowest quarterly total since mid-2010, according to Fitch calculations. In August, the market slowed because of concerns about a Greek default, the U.S. debt ceiling and low growth, which "had a profound impact on the refinancing cliff," according to Fitch. If the slowdown were to accelerate, it would come at a particularly bad time. Currently, however, the leveraged loan market is in the process of refinancing approximately $1.1 trillion of loans maturing between 2011 and 2015. Nevertheless, Fitch expects that defaults will hover near 2% because it expects the high yield bond markets to be able to refinance or amend all of the $266 billion coming due in 2012. Were debt fears were to escalate, Fitch expects that defaults could rise above historical averages to near 4% by 2013. That rate could accelerate because "limited refinancing capacity will likely be available in 2012 to refinance and/or extend a meaningful portion of loan maturities in 2013 and 2014 in the case of a prolonged slowdown," writes Fitch. In spite of dire predictions and similar fears emerging throughout the recession, bond markets have only recently started to blink. Earlier in the year yields for the Bank of America Merrill Lynch Global High Yield Index touched on record lows of 6.64%, only to rise with escalating bank and government debt fears to two-year highs of 9.6% in October. While ratings agencies Moody's, Standard & Poor's and Fitch expect overall defaults to be between 2% and 4% in 2012, their overall ratings mix may put some at increasing risk and with little room to maneuver going into a potential refinancing glut.
Currently, S&P holds 52% of the near 3,000 corporations it rates at sub-investment grade, its highest level since before 1987. S&P gives over 70% of companies in businesses such as transportation, media and entertainment, forestry and homebuilders, healthcare and chemicals junk ratings. For stressed companies in those industries, 2012 may be the end of the road for debt laden companies. With more than a doubling in refinancing needs in 2012 and an even heavier load in later years James Gellert Chief Executive of Rapid Ratings says, "unless the markets bounce back dramatically, there are going to be 'haves' and 'have nots' in terms of those who can access capital." -- Written by Antoine Gara in New York
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