How a Small-ish Stock Market Swoon Might Unleash the Next Credit Nightmare

‘Weakest link’ companies worst since October 2009. The ‘weakest links,’ according to S&P Global Ratings, are financially squeezed companies that S&P rates B- (neck-deep into junk), with ‘negative’ rating outlooks or negative implications on CreditWatch. They’re uncanny predictors of corporate defaults. When the number of ‘weakest links’ rises, the default rate will soon rise as well. The last three times it rose enough, a recession kicked in. The last two times were accompanied by fabulous fireworks in the markets.
In August, the number of ‘weakest link’ companies rose to 251, the highest since October 2009, up from 140 two years ago, and heading toward the record of 300 in April 2009 when the financial world was coming unglued.
These weakest links have $359 billion in debt outstanding.
They serve as ‘potential default indicators’ because they’re almost 10 times more likely to default than run-of-the-mill junk-rated companies, according the S&P report, cited by Bloomberg. Blame oil and gas? The markets surely would like to. But only 62, or 25% of the weakest links, are oil and gas companies. The next largest sector: 34 financial institutions for a share of 14%.

This post was published at Wolf Street on September 3, 2016.