Issue 26: 2014

Insights

A Seven-Step Guide to Corporate Defaults

A guide to how economic recovery and rising interest rates could affect corporate
default rates.

Photograph by Ben Hoffmann

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That corporate default rates rise during an economic crisis might seem obvious. After all, even though the Federal Reserve might resolve to lower interest rates and stimulate growth during a crisis, that’s also when corporate revenues and profitability fall, leverage and debt rise, and weaker companies struggle to service that debt.

On the other hand, the behavior of the cycle of default in periods of economic growth and rising interest rates is somewhat less clear-cut or well known.

U.S. Trust believes we are in such a period of growth. The economy has, by many measures, continued picking up steam. The Fed recently began “tapering” its long-term economic stimulus program, a move it expects will lift interest rates. This seven-step guide, prepared by U.S. Trust Fixed Income Research, will give you some perspective on what to expect from corporate defaults in this climate.

For more information on fixed income investing, or if you are considering changes to the fixed income portion of your portfolio, be sure to contact your U.S. Trust advisor.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Fixed Income
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

Investments in high-yield bonds (sometimes referred to as “junk bonds”) offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a junk bond issuer’s ability to make principal and interest payments.

Other
Credit and collateral subject to approval. Terms and conditions apply. Programs, rates, terms and conditions subject to change without notice.

Breakdown reflects ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. For additional information on ratings, please see standardandpoors.com, moodys.com, and/or fitchratings.com.

That corporate default rates rise during an economic crisis might seem obvious. After all, even though the Federal Reserve might resolve to lower interest rates and stimulate growth during a crisis, that’s also when corporate revenues and profitability fall, leverage and debt rise, and weaker companies struggle to service that debt.

On the other hand, the behavior of the cycle of default in periods of economic growth and rising interest rates is somewhat less clear-cut or well known.

U.S. Trust believes we are in such a period of growth. The economy has, by many measures, continued picking up steam. The Fed recently began “tapering” its long-term economic stimulus program, a move it expects will lift interest rates. This seven-step guide, prepared by U.S. Trust Fixed Income Research, will give you some perspective on what to expect from corporate defaults in this climate.