Standard & Poor’s is growing increasingly concerned that many companies in the United States could find it difficult to refinance their enormous debt loads in the coming years, possibly leading to an explosion of defaults and bankruptcies.One area that has surprised me over the last year—this is code for saying I was completely wrong ;)—has been the junk bond market. It's amazing to me how well the market has received low quality corporate bonds. I think some of the rally in junk bonds made sense given the sell-off in 2008, but it still amazes me how easily the weak companies, especially the over-leveraged Private Equity purchases, were able to re-finance in the last year. It remains to be seen how this situation unfolds over the next few years. If bonds default, the big losers will be pension funds, insurance companies, and others who invested heavily in private equity earlier in the decade.
Private equity firms borrowed enormous sums of money from banks to finance the buyout of companies and then loaded the target companies up with debt.
But the target companies have since had a hard time paying down their debt because of the down economy, which blunted profits.
S.&P. believes that these companies have been successful in pushing back their debt maturities past 2010, avoiding a potential rash of defaults and bankruptcies this year.
Tags: bonds and credit instruments