The next spike in corporate defaults will be a doozy.

When the next corporate default wave comes, it could hurt investors more than they expect.
Losses on bonds from defaulted companies are likely to be higher than in previous cycles, because U.S. issuers have more debt relative to their assets, according to Bank of America Corp. strategists. Those high levels of borrowings mean that if a company liquidates, the proceeds have to cover more liabilities.
In bad times, corporate bond investors on average lose about 70 cents on the dollar when a borrower goes bust. In this cycle, that figure could be closer to the mid-80s, the strategists said.

"A lot of the troubled companies that had become overleveraged were able to find more temporary solutions in the last credit cycle," Holtz said. "Those Band-Aids are no longer available now, and a lot of companies are going to have to face distress," he said.
Leverage levels have been rising as more companies use borrowings to refinance existing liabilities, buy back shares and take other steps that do not increase asset values, Holtz said. Capital expenditure, which does boost assets, has been relatively low during this cycle.

Junk-rated companies have debt equal to about 48 percent of their assets now, up 7.5 percentage points in the last 7 years, according to Bank of America Merrill Lynch data. The ratio of debt to assets is one of the main factors in how big losses will be when a borrower defaults.
Another factor is the rate of default, because when more companies are defaulting, more are looking to sell assets or otherwise restructure, leaving investors with lower recoveries. Default rates currently stand around 4 percent, according to Moody’s Investors Service. The ratings company forecasts that the measure will rise to 5.05 percent by the end of the year in the best-case scenario, and could jump as high as 14.9 percent under the most pessimistic projection.

Puerto Rico's Development Bank on the brink

Puerto Rico’s Government Development Bank, which was set up after the Great Depression to chart a course out of poverty, is on the verge of a collapse that would deepen the Caribbean island’s $70 billion debt crisis.
The lender was designed to promote business investment with a long-term horizon, but in recent years politicians turned it into a piggy-bank that lent to the government and its agencies, helping keep them afloat as the island’s economy shrunk. Now it’s rapidly running out of cash and likely to default on a $422 million debt payment due in May -- raising the risk that it may be pushed into receivership or broken up.
The bank’s failure would undermine one of the last sources of cash that Puerto Rican authorities are counting on to pay teachers, firefighters and other employees, in a territory where almost half the population lives in poverty. Hedge funds are also laying claim to the money, filing a lawsuit against the lender this week, while in Washington lawmakers are mulling steps to put the island government under federal oversight and give it legal powers to restructure its debt.

Puerto Rico's time runs out

Puerto Rico took steps on Tuesday toward a unilateral moratorium on all government debt payments, rejecting efforts in Washington to allow it to restructure only under close federal supervision.
The Puerto Rican Senate authorized a declaration of emergency and a debt moratorium at around 3 a.m., after hours of debate. The island’s House of Representatives was debating such a measure late Tuesday but had not yet voted. Any bill would need to be signed by the governor, Alejandro García Padilla.
The sudden moves seemed likely to complicate efforts in Washington to enact a rescue package for Puerto Rico. The House Natural Resources Committee, which has been drafting the rescue in consultation with Democrats in Congress and the Treasury Department, said it still planned to issue an updated version on Wednesday, despite Puerto Rico’s action.
The rescue involves sensitive constitutional issues, and the drafters have been trying to strike a balance between Democratic and Republican Party priorities. So far, the lawmakers in Congress have called for sending a federal oversight board to Puerto Rico, auditing all major branches of government there, promoting fiscal reforms and eventually providing certain restructuring tools that are normally available only in bankruptcy.

NIRP destroys Japan's debt market

Two months after the BOJ said it would start charging interest on some lenders’ reserves, the outstanding balance in the interbank call market tumbled to a record low 2.97 trillion yen ($27 billion) on March 31, according to Tanshi Kyokai data going back to 1988. While the brokers association and the Japan Securities Depository Center said two weeks ago they had upgraded systems to settle transactions at sub-zero yields, traders say more than technical issues are preventing a revival.
“Among central banks, the BOJ is the one that destroys functioning markets the most,” said Izuru Kato, the president of Totan Research Co. in Tokyo. “Companies will slash staff and scale back operations where activity is grinding to a halt, exposing markets to spikes in rates when the time comes for normalization.”
The disruption to Japan’s ground zero for bank funding coincides with a collapse in bond-market trading over the past year, even as the BOJ’s hoarding of notes has left it nowhere near achieving its 2 percent inflation target three years after Haruhiko Kuroda became governor. When questioned by a lawmaker in parliament last month, Kuroda agreed that it would be theoretically possible to lower rates to minus 0.5 percent, from the current minus 0.1 percent.

Forget the Panama Papers

After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners. By resisting new global disclosure standards, the U.S. is creating a hot new market, becoming the go-to place to stash foreign wealth. Everyone from London lawyers to Swiss trust companies is getting in on the act, helping the world’s rich move accounts from places like the Bahamas and the British Virgin Islands to Nevada, Wyoming, and South Dakota.
“How ironic—no, how perverse—that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” wrote Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, in a recent legal journal. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”