Not Just Sovereign Debt, US Junk Bonds are Also Catastrophic

The easy credit era leading up to 2007 was largely financed by corporate bonds issued to come due in five to seven years. This means that in addition to issuing record US debt in 2012 to 2014, there will also be a concurrent financial reckoning day for private debt refinancing.

According to The New York Times:

“The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.

“Indeed, worries about the growth of national, or sovereign, debt prompted Moody’s Investors Service to warn on Monday that the United States and other Western nations were moving “substantially” closer to losing their top-notch Aaa credit ratings.

“Sovereign debt aside, the approaching scramble for corporate financing could strain the broader economy as jobs are cut, consumer spending is scaled back and credit is tightened for both consumers and businesses.

“The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd.

“Even Moody’s, which is known for its sober public statements, is sounding the alarm. ‘An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,’ said Kevin Cassidy, a senior credit officer at Moody’s.”

To review… the debt “avalanche” is indeed unparalleled. As the article later explains — for the three years 2012 through 2014 — over $700 billion in corporate junk bonds will come due, about $4.6 trillion in debt will need to be raised by Uncle Sam, and another $1.2 trillion in regular loans must be refinanced for ordinary investment-grade corporations.

This huge amount of debt, all to be dealt with at right about the same time, is what bond analysts refer to as a “maturity wall”… and it’s a wall that the US is quickly hurtling towards.

You can read about the specific risky companies that will need to refinance massive loans in The New York Times’ coverage of how corporate debt will contribute to a 2012 credit squeeze.


Rocky Vega,
The Daily Reckoning