Defaults in the U.S. are going to rise in 2016 and volatility in the credit markets could increase the likelihood of a recession, according to New York University Prof. Edward Altman, developer of the “Z-Score” method for predicting bankruptcies.
“There is no question in my mind this year default rates will go beyond the average rates, maybe a lot more,” said Altman, who was speaking at the Turnaround Management Associations’ Annual Altman Luncheon Conference in New York Monday. Altman teaches finance at NYU and is considered a specialist in credit markets.
The default rate on high-yield bonds was 2.8 percent in 2015, compared with a weighted average of 3.7 percent, according to Altman.
“The high-yield markets have grown so big, you don’t need to have a large default rate to have tons of debt in trouble,” said Altman. At a 2.8 percent rate, as much as $45 billion of U.S. debt defaulted last year. This year, he expects Chapter 11 filings to rise led by companies in energy, coal and metals and mining.
January has been the worst start to a year ever for credit markets, according to Citigroup Inc. research, the S&P 500 is down 7.4% this month, and oil prices are at a 12-year low. Altman said the correlation among stocks, bonds and energy prices has never been higher, meaning that when stock markets move the spillover to bonds and energy prices is even more powerful. That hasn’t happened before, he said.
“I didn’t expect things to change this quickly in the last month,” Altman said. “Last Friday, we had a swing by one percent, and we almost never see a one-percent swing in a day in the fixed-income markets. It shows a huge amount of volatility.”
These credit market fluctuations caused by global economic problems makes a recession increasingly possible, he said.
“Crises in the credit markets will trigger economic recessions,” Altman said. “We don’t need a 10 percent default rate to have a recession. I am not saying we will definitely go into recession, but it’s fair to say the likelihood of recession in the U.S. is much higher than just three months ago.”