Roosting Time?

The chart and excerpt below appeared in a Business Insider article a few days ago. We have long questioned, to use a kind term, the quality of corporat earnings. There might be some other birds out circling their way home to roost, businessinsider.com/tsunami-about-to-hit-bond-market-2016-6?, also.

1. Decreasing profits: Mish notes that corporate profits fell 7.6% in the first quarter against the same period a year ago. In order to pay back loans, companies need to continue to make more, and with less cash coming in, there will be less to allocate to debt.
   
   UBS
2. Lending standards are getting tighter: Firms also have the ability to pay down debt that is coming to maturity by issuing new debt, effectively kicking the can down the road. Lending conditions for new debt, however, are getting tighter as banks focus on higher quality borrowers. In turn, this makes it tougher for companies to pay for debt with more debt. 
3. Debt is getting more expensive: Loan spreads, or the difference between what banks have to pay to borrow money and what they charge companies in interest on loans they then give out, are starting to widen. In other words, new debt is getting more expensive. 

Add up these factors and you've got a problem for companies with debt outstanding, and the $1 trillion market for low-grade, risky bonds. This trouble is not just limited to the commodity space. Mish estimates that the default rate for nonenergy firms will creep up to 3.5% in 2016, up from 1.5% currently.