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____ Friday October 30 , 2015 ____

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Chart of the Week

Nobody Goes Bust Anymore

by Michael Hayhoe

Below is a chart showing the annual default rate for Single B Corporate Bonds.

“We can’t overstate how low overall defaults are. The 2010-2014 cohort is the lowest 5 year period for high yield defaults in modern history” Deutsche Bank 4/2015.

Since the crash the authorities everywhere have been leaning on the banks to exercise forbearance in respect of their marginal borrowers. In the case of the US and Canada this behavior has produced the lowest incidence of corporate bankruptcies in modern economic history. As a consequence many firms have been kept on “life support” by financial sponsors unwilling to risk collecting what is owed them through a court sponsored process. This consequential “zombie” borrower problem has been allowed to grow to such a point that any normalization of rates, however slight, risks a massive outbreak of bankruptcies. Recent weakness in key sectors, most notably commodities, resources and oil has infected the balance sheets of companies operating in those sectors with the same virus.

This is an unintended byproduct of ZIRP (Zero Interest Rate Policy) we have now been under for the last 7 years since the Great Financial Crisis of 2008. No one goes broke anymore, not when money is free (think about Greece, did they go bust? Nope, the ECB just "restructured" their debt and lent them more). This is another reason why many feel the Fed can't/won't raise rates until their hand is forced by inflation. Enjoy the free money while it lasts!

We live in interesting monetary times!

Mike Hayhoe, BSc, CIM® Branch Manager & Senior Investment Advisor | Independent Wealth Management Canaccord Genuity Wealth Management

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