Snapshots is trying to stay cool in near record UK temperatures, which are the hottest since the summer of 1976.

2008 and 2001

Speaking of yearly comparisons, we were trawling through default tables for corporates recently.  It is striking how the corporate default experience during the recession of 2008 was smaller than the corporate default experience during the recession of 2001.

The 2008 recession was caused by a collapse in house prices. This rippled into sub-prime mortgage defaults that led to the collapse of Lehman Brothers, which was the biggest bankruptcy filing in history. The financial sector was at the centre of the recession and the decline in GDP and rise in unemployment was the largest since the great depression.

The 2001 recession was caused by the collapse of the dotcom bubble and a series of corporate accounting scandals (Worldcom, Enron, Parmalat) that shook confidence in the corporate sector. The corporate sector was at the centre of the recession but the decline in the real economy was actually quite shallow (again as measured by GDP decline and unemployment rise).

Corporate Leverage

These days, banks are more tightly regulated and are required to hold higher levels of capital against risky mortgages. They have also had to build up big capital buffers against future recessions.

Corporates on the other hand have been leveraging up their balance sheets. JP Morgan calculations show net leverage in the US Investment Grade space at the highest levels since 2000.  Leverage in BBB corporates is particularly high and they have been prolific issuers in the debt markets (as a percentage of total issuance).

We are monitoring these higher leverage levels closely and think the next recession could look more like 2001.

Good luck.

Asif Godall
Co-Chief Investment Officer