Default ‘Wave’ of $1.6 Trillion Looming for Junk, Fridson Says

Almost $1.6 trillion of junk bonds globally will default between 2016 and 2020, according to Martin Fridson, chief executive officer of New York-based FridsonVision LLC, a research firm specializing in speculative-grade debt.

With historical evidence indicating default rates will surge between 2014 and 2016 and persist, implying a rate of more than 30 percent cumulative during four years, Fridson estimated in a report for Standard & Poor’s Capital IQ Leveraged Commentary and Data that the face value of total defaults will be $1.576 trillion. That’s a market value of $752 billion, according to Fridson, who started his career as a corporate debt trader in 1976.

“When the default tidal wave eventually hits, it will be very big,” Fridson said in an e-mail. “No one realizes how much distressed debt is going to be available for investment when it finally hits.”

The extra yield relative to government securities investors demand to hold the debt rated below Baa3 at Moody’s Investors Service and less than BBB- by Standard & Poor’s has widened to 438 basis points from 431 basis points on Nov. 1, the narrowest since May 22, according to the Bank of America Merrill Lynch U.S. High Yield Index.

The benchmark U.S. 10-year Treasury note’s yield will rise to 2.78 percent at year-end and 3.33 percent by the end of 2014, according to forecasts compiled by Bloomberg. Junk defaults worldwide fell to 2.8 percent at the end of last month from 3.2 percent in October 2012, unchanged from September, according to a Moody’s report dated Nov. 8.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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