Nelson Schwartz of The New York Times has a very farsighted piece on corporate debt in America. The year 2012 will be the beginning of a 3 year period when over $700 billion of high-yield corporate debt will need to be paid. A drastic increase which some analysts anticipate could overwhelm debt markets.
"Uncle Sam" (The US government) will need to borrow $2 trillion for the deficit and for refinancing existing debt. Private equity firms and nonfinancial companies were able to borrow at relatively low rates before the credit mess hit in 2007. But it won't be until 2012 when some of these pre-2007 leveraged buyouts have to really start "paying the piper" and the price will be high. Why 2012? Because the humongous amount of bonds and loans issued to pay for those LBOs usually come due in five to seven years. This has unintentionally "setup" a type of economic doomsday---or what bond experts call a maturity wall. This year only $21 billion in junk bonds will be due. In 2012--$155billion, in 2013--$212billion, and in 2014--$338 billion.
Credit markets have been closer to normal in recent months. But a dark cloud looms with that 2012--2014 period when demand for credit will rise.
As you might imagine, derivatives have been a large part of this rapid increase (or snowballing) of risky corporate debt. The "badboy" miscreants in this particular story are being played by derivatives called CLOs or corporate loan obligations. These CLOs are corporate loans that have been bundled together or "packaged", probably in different "tranches" (or classes) of quality, just the same as mortgages were bundled in CDOs to be sold. No doubt this resulted in more risky loans being made.
Many of the companies holding these large risks for the 2012--2014 period are private equity firms. There are a few bond analysts, with "skin in the game", who believe most firms will survive this 2012-2014 period of adversity anticipated for the junk bond market. The losers will likely be the companies with the largest amounts of debt, with not enough cash flow to cover it. They will be competing with better rated borrowers looking to sell debt at the same time, including the gargantuan U.S. Treasury. Most likely interest rates for borrowing will rise during this time period (2012--2014).
And I close here with direct quoting of Nelson Schwartz's well written NYT story:
“These are huge numbers,” said Tom Atteberry, who manages $5.6 billion in bonds for First Pacific Advisors, and is particularly alarmed by Washington’s borrowing. “Other players will get crowded out or have to pay significantly more, because the government is borrowing so much.”