The credit quality of global issuers has reached its lowest level in 25 years, according to credit rating agency Moody's
It's manifest that no one has been spared the ax recently: Despite a fortress-like balance sheet, Berkshire Hathaway
So, why am I encouraged?
Bluntly put, Moody's and its main competitor Standard & Poor's (a unit of McGraw Hill) haven't been ahead of the curve in predicting the developments in the current crisis. My guess (and it is really no more than an educated guess at this stage) is that when the credit rating agencies make these sort of doom-and-gloom pronouncements, more than anything else, it is an indicator that the bottoming process in the economy and bond markets is already under way.
Bond markets certainly haven't been hanging around for S&P or Moody's to bless or punish this or that company; prices already reflect gloomy prospects -- particularly in the high-yield (aka "junk") segment.
High yield looks meaty
In a note to clients last month, Jim Reid of Deutsche Bank wrote that U.S. junk bond index yields imply that issuers will default at a rate exceeding 50% over the next five years -- even assuming that investors don't recover a single penny on their defaulted bonds. That compares with an actual default rate of 31% in the early 1990s and 2000s and recovery rates near 20% in 1990 and 2002.
Credit rating agencies remain highly influential, but I think the market has already been discounting forecasts that are at least equally as dire as Moody’s most recent statistics, creating opportunity for value-oriented investors.
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Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Berkshire Hathaway, Moody's, and The McGraw-Hill Companies are Motley Fool Inside Value picks. Berkshire Hathaway and Moody’s are Motley Fool Stock Advisor selections. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.