Guggenheim's Minerd sees defaults, recession ahead

Companies that have borrowed heavily will have a hard time as rates tick up, he says

Mar 21, 2018 @ 4:00 pm

By Bloomberg News

Companies that went on a borrowing binge may default on their debt as interest rates increase and the prospect of a recession grows, according to Scott Minerd, chief investment officer at Guggenheim Partners.

After skirting defaults and bankruptcies during the last recession, corporations may not be as lucky this time around, Mr. Minerd said in an interview on Bloomberg TV on Wednesday.

"There are a lot of companies that are zombie companies that survived the last cycle," he said. "With rates going up, it will be harder and harder [for them] to stay alive."

Since the last recession, low interest rates have spurred U.S. companies to lever up, using cheap debt to buy back stock and boost equity prices. Within three months, as Libor rates tick up, many are going to struggle with debt service and free cash flow, Mr. Minerd said. Highly-levered firms also will get hit with a new tax reform policy that limits their ability to deduct interest costs.

Mr. Minerd said that in terms of debt risk, the media and utilities sectors are "disturbing places." Guggenheim is "moving away" from high-yield debt and bank loans, he said.

Mr. Minerd also predicted the yield curve would be "relatively flat" by this time next year, and, if the Federal Reserve continues raising rates, the curve will be inverted by the end of 2019. If it follows historic trends, the U.S. economy would be looking at a recession within six to 12 months from the time the curve inverts, or as soon as late next year or the first half of 2020, he said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Advisers should look beyond 529 plans for college planning

Editor Fred Gabriel talks to reporter Ryan Neal about how college-savings strategies are more important than ever as tuition costs soar.

Latest news & opinion

New ways to pay for college

Experts respond to real-life scenarios of people struggling to afford higher education.

How technology is reshaping the advice business

Artificial intelligence, Amazon and robo-advisers are some of the topics on the minds of tech experts.

Best- and worst-performing sector funds and ETFs this year

A rising tide may lift all ships, but a bull market doesn't lift all stock sectors. Here are the best- and worst-performing sectors this year, with the top and bottom fund in each sector.

Betterment slapped with $400,000 fine from Finra

Robo-adviser cited for violating customer protection rule and not maintaining its books and records correctly.

Supreme Court ruling on SEC judges unlikely to upend advice industry

But it could give rise to new hearings for some advisers who are already in litigation with the agency such as Dawn Bennett.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print