A Default Cycle With Sky-High Financial Markets | FTI Consulting

Can a Default Cycle Coincide with Sky-High Financial Markets?

American Bankruptcy Institute Journal | Turnaround Topics

Corporate Finance & Restructuring | ABI Journal, August 1, 2020 (Reprint)

August 27, 2020

Increasingly it appears that the upturn in events of corporate debt default and bankruptcy since the arrival of COVID-19 constitutes a bona fide default cycle in the U.S.—a prolonged period of elevated incidents of corporate failure lasting a year or longer. This year likely will finish with a doubling of such events compared to 2019, and the largest number of defaults and Chapter 11 filings since the Great Recession of 2008-2009.

Against this backdrop and the lingering negative effects of the pandemic, equity markets are at all-time highs and corporate bond yields are near record lows. There is little historical precedent for such incongruous events to coincide. With the residual effects of COVID-19 sure to linger for many more months, the uncertainty and debate around the timing and shape of the recovery is intense. Economists, investors and market strategists are all trying to grasp what “normal” will look like in a post-pandemic economy.

In this article for the American Bankruptcy Institute Journal, Michael Eisenband and John Yozzo make the case that a default cycle is underway, and consider whether high levels of corporate failure and record high financial markets can persist indefinitely.

This is an extract from an article first published on August 1st 2020 in the American Bankruptcy Institute's Journal. The entire article is available at: https://www.abi.org/abi-journal/can-a-default-cycle-coincide-with-sky-high-financial-markets

"The socio economic, political and market-related fallout from the global pandemic is so unprecedented that it is hard to find relevant context or a historical parallel. Regardless of the specific topic, be it the human toll of COVID-19, a near shutdown of the domestic economy, sudden unemployment spikes or a dramatic financial market movements, the word "unprecedented" has become justifiably overused. There is no template or playbook for this moment, and that lack of precedent is one reason why expectations among business leaders, financial markets and policymakers are so wide-randing and erratic."

Reprinted with permission from the ABI Journal, Vol. XXXIX, No. 8, August 2020.

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