by Calculated Risk on 11/11/2006 12:29:00 AM

Almost no one defaults because almost everyone can borrow. That defaults are few reassures lenders there is little danger.

From the NY Times: Are High Credit Ratings Just a Thing of the Past?

"You have an incredible amount of liquidity sloshing around in the market,” said Diana Vazza, the head of global fixed-income research for Standard & Poor’s, the bond rating company.

Much of that money is seeking higher returns, and is thus willing to accept higher risks. That willingness to buy has meant that borrowers with dubious credit end up paying relatively little for the money.

Of the companies receiving their first ratings from Standard & Poor’s this year, fewer than 10 percent received investment grade.

The median rating for all American nonfinancial companies is now BB, or relatively high-quality junk. A decade ago, the median rating was BBB, an investment grade rating.
...
And yet default rates remain low. S.& P. reported this week that just 1.3 percent of all corporate bonds went into default over the last 12 months, while the figure in Europe is just 0.5 percent. It expects the United States rate to rise to 3.5 percent by early 2008, but that is still below historic averages.

Some companies that would have defaulted in earlier times, Ms. Vazza said, can avoid that fate simply by refinancing their debts. Lenders, including hedge funds and private equity funds, retain a lively appetite for risk.

There is something circular here: Almost no one defaults because almost everyone can borrow. That defaults are few reassures lenders there is little danger.

There will be a catch one of these days. If and when credit tightens — in the sense that lenders are less willing to lend to poor credits — then many companies are likely to find that they are in trouble that they cannot ride out without new loans, which would be unavailable. The problem could be particularly acute if it came when the country was in a recession.