From Birch Gold Group
The economic effects of the COVID-19 pandemic and recent Fed monetary policy continue to reveal themselves.
The latest “reveal” that’s taking center stage is risky corporate leveraged loans, with defaults soaring to their highest levels since 2010 by issuer count, and since 2015 by rate.
A report by S&P Global Intelligence breaks everything down, starting with a summary:
U.S. loan defaults continued to rise in July, surpassing 4% by issuer count for the first time since 2010, after five constituents of the S&P/LSTA Leveraged Loan Index tripped defaults on $7.7 billion of term loans.
You can see the billions in defaults by year in the chart below, and how the U.S. hasn’t seen an amount even close since 2009 (with four months still remaining in 2020):
“With economic fallout from the coronavirus pandemic playing an increasing role, default volume over the last 12 months, at $46.35 billion, outpaces the same period of 2019 by 233%,” according to the same report.
Even more sobering than this astonishing surge, it looks like a critical sector of the economy that shouldn’t be defaulting on leveraged loans is the sector that’s contributing the most defaults…
Oil and Gas Companies Reveal How Fragile the Situation Is
It appears things wouldn’t be “so” bad if oil and gas companies weren’t defaulting by more than 30% of their total loan amount. You can see their “contribution” to this dire situation reflected in the chart below:
You can also see how oil and gas leveraged loan defaults could also have played a role in the dramatic Dow crash at the end of 2018 in the same chart above.
The S&P Global report notes that some examples of the energy sector carnage include (but are by no means limited to):
- California Resources, which in July filed for Chapter 11 bankruptcy.
- Fieldwood Energy defaulted in May upon failing to make payments… just one year after emerging from bankruptcy.
- Ultra Petroleum Corp. in May filed for bankruptcy after completing a distressed exchange in 2018, having emerged roughly one year earlier from bankruptcy
The report adds, “Many in the energy space have in the past attempted to right-size their capital structure in an effort to ride out what became a historic and sustained low oil price environment.”
Again, these aren’t just large corporations that sell goods to the public, these are energy companies that are vital to the infrastructure of the nation.
And they are defaulting, filing bankruptcies, or both. Does that appear to you to be a good sign for the health of the U.S. economy?
Preparation Can Meet Opportunity If You Start Now
If you wait until defaults overwhelm the system, by then it will be too late to think about making sure your savings will rise to the challenge.
So if you haven’t done so already, now is the time to examine your risk levels and asset classes, and square them away.
It’s also a good time to take advantage of the opportunity to diversify some of your savings into precious metals like gold and silver. They have been known to act as a hedge against economic uncertainty.