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DEUTSCHEBANK’S WORST CASE DEFAULT SCENARIO…

14 February 2012 by Sober Look 3 Comments

By Walter Kurtz, Sober Look

Deutschebank is predicting a potentially scary scenario with respect to the US non-investment grade corporate default rates. Their forecast shows three cases: base, optimistic, and pessimistic.

Surprisingly the optimistic and the base cases are nearly identical, with default rates of around 2.5% – close to historical lows. The justification is the relatively low leverage for non-investment grade firms, high liquidity positions, and a market that is hungry for “yieldy” paper. But the pessimistic scenario that assumes a material downturn in the US economy (likely driven by Europe) is quite grim, pushing toward an 8% default rate in 2013. This basically assumes that any refinancing opportunities for these companies have been shut down as they were in 2008.

Non-investment grade default rate forecast (source: Deutschebank)

In such a scenario, the equity markets would hit new recent lows and the unemployment rate will go back to the 09 levels. DB is not assigning a probability to these scenarios – nevertheless this pessimistic outcome is quite unsettling.

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Sober Look

Sober Look was founded by Walter Kurtz, a New York based hedge fund manager and credit markets specialist.

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Comments
  • tradeking13

    Ahhh. “A market that is hungry for ‘yieldy’ paper.” Where have we seen this before?

    02/14/2012 at 5:45 PM
  • quark

    Is this the same grp that came out with the doomsday scenario on either municipal or mortgage defaulta or maybe it was mortgage defaults leading t municipal defaults…b4 Whitney. Both were headliners. As you have mention…prognosticating isnt worth a damn if you cant get the timing right.

    02/14/2012 at 7:50 PM
  • Leverage

    The FED wouldn’t let it happen, and in this case they have tools to stabilize the situation. The worst case scenario is out of question, at least for now, the FED will buy all the paper it needs and more before letting any sort of free market develop.

    We all live now in a bail-out infinite world (bailout for big money, not for citizens, that is).

    02/15/2012 at 7:08 AM