A vintage year for failures

NYU Stern Professor Ed Altman loves bankruptcies so much that he uncorks a bottle of vintage claret and shares it with Mrs Altman whenever a big bankruptcy occurs. That being the case, the Altman house could be permanently sozzled in the next couple of years.
 
He loves bankruptcies because they give more ammo to his Z score, a linear bankruptcy predictor that he pioneered decades ago. When this correspondent heard Professor Altman speaking in New York more than 10 years ago, he mentioned then that he was stymied by the lack of defaults with which to prove his theories. Since then, bankruptcies have increased, and he believes we are now in a purple patch, a glorious age of failure.
 
"Deleveraging is difficult when a government is trying to stimulate growth, for example by slashing interest rates," he says. "Yet the quickest way to deleverage is to go bankrupt."
 
We arrive in a distressed position after several years of unprecedented liquidity; years in which distressed debt funds had so few distressed opportunities that they resorted to direct lending to corporates -- and fuelled the credit fire. In recent years even CCC-rated companies could get capital markets financing. That, of course, has now changed and spreads between high-yield markets and 10-year Treasury notes have shot up, and now stand at 1,400 basis points. Professor Altman thinks that while that ratio looks fairly priced at present, as further hurdles cause slip ups, spreads could rise further.
 
"Liquidity nowadays is when you wet your pants after you look at your portfolio," he observes. "Default rates peak at the end of a recession, or just after the end. So to judge when maximum defaults will take place, start by trying to figure out when you think growth will return to zero."
 
The Altman bankruptcy models used to be published infrequently. This took the form of a mortality rate indicator, an actuarial-style technique that looked at the credit quality of a company at birth, then tried to work out how long it would exist before conking out. Nowadays that model is complemented by market-based models that churn out different predictions of default every day.
 
For the 1997 Asian crisis, his models -- that look at micro levels of potential individual corporate delinquency -- tagged South Korean companies, followed by Thai and Indonesian firms as being the most likely renegades. Illustrating just how macro and micro issues are intertwined, those countries did suffer worst.