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Will 2016 bring more company defaults across the globe?

Around the world, companies have defaulted on at least 95 billion dollars worth of debt this year -- the highest numbers of Business Defaults since 2009, according to Standard and Poor’s. For perspective into what happened in 2015 and a look at what to expect next year, NewsHour’s Hari Sreenivasan speaks with Financial Times reporter Eric Platt.

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  • MEGAN THOMPSON, PBS NEWSHOUR ANCHOR:

    This year, the Dow Jones Industrial Average is down almost 3 percent, reflecting the loss of billions of dollars in stock value in U.S. companies. Around the world, companies have defaulted on at least $95 billion worth of debt, in the highest number of business defaults since 2009, according to Standard and Poor's. Some companies encountered scandals, while others simply under-performed.

    For perspective into some of the events of 2015 and what may lie ahead in 2016, Hari Sreenivasan spoke earlier with "Financial Times" reporter Eric Platt.

  • HARI SREENIVASAN, PBS NEWSHOUR ANCHOR:

    So, this is such an enormous number. It's hard for people to get their minds around. Why are these companies defaulting? Or what's the primary reason? Or if there's a particular sector?

  • ERIC PLATT, FINANCIAL TIMES:

    First, one of the big things that companies were able to do over the past few years was take advantage of cheap financing and cheap debt with the Federal Reserve keeping the rate at zero. You know, it wasn't hard for an energy company to get a 3 percent or 5 percent loan in effect. And now, suddenly, commodity prices tumbled.

  • SREENIVASAN:

    So, the price of oil is a lot cheaper now than it was a year ago, right?

  • PLATT:

    Exactly, and not just oil. It's, you know, copper and iron ore, you know, it's affecting much more than the traditional oil and gas companies that are drilling in the U.S.

  • SREENIVASAN:

    So, they borrowed from their creditors saying, "Listen, we're going to be good for it. The price of oil is going to go up and the price of commodities will go up," and they didn't.

  • PLATT:

    Exactly. And they said, you know, "We can finance ourselves in the future, if oil at about $100 a barrel, we can make $20 of profit on that."

    And with oil at about $35 a barrel now, they're suddenly making, you know, huge losses and the question is, how long can they keep going before they have to make payments that they can't afford?

  • SREENIVASAN:

    And so, the creditors are saying, "I want my money back."

  • PLATT:

    Exactly, creditors are saying, "We're not lending to you anymore. And when they come due, you know, we're going to come after you. We're going to want either asset sales or we're going to take control of the business". You will see some restructuring, that almost every analyst at the major credit rating agencies like the Standard & Poor's, expect that defaults will increase over the next two years.

  • SREENIVASAN:

    Are basically junk bonds worth junk now?

  • PLATT:

    Well, yes. So, one of the things that we've been watching are the lowest rated companies, rated CCC. They're kind of the lowest tier on the scales, and the yields on those companies have shot up to 18 percent. So, if you're holding it, you are clipping a very nice coupon. You know, 18 percent a year is very attractive, but you have that risk of default.

    And I think the thing that surprised investors most this year were the companies that were rated investment grade, rated strong A ratings, and they saw their downgrades and cut.

  • SREENIVASAN:

    Well, you know, it's interesting that you mentioned the downgrade, I saw recently "The Big Short", which is one of these holiday movies, and is it similar to the last crisis? Have we learned lessons? Are the ratings agencies being more aggressive in saying, guess what, not everybody is going to be AAA, not everybody is going to be a wonderful rank or rating?

  • PLATT:

    I think you have seen more caution from the rating agencies. One of the things we've seen some issues this year with companies like Valeant or Volkswagen with the emission scandal is people wonder, the last time this happened, it was Enron and WorldCom, and they were massive disasters. So, are these more systemic risks or are these just company-specific issues? And so, that's a fear for a lot of investors.

  • SREENIVASAN:

    You know, you mentioned Volkswagen, that was a company that people thought was stable and able, rock solid. And now, you have to wonder, you know, given how deep this behavior was, are there other shoes to drop?

  • PLATT:

    Exactly. If I'm an automotive executive at another company and I see Volkswagen has these great test results and I'm trying to compete with them, at some point, there's got to be some triggers like maybe Volkswagen isn't doing this with just pure mechanics. And actually, you saw German regulators open investigations into other diesel producers like Ford and Daimler.

  • SREENIVASAN:

    There are some scandals that have weighed heavily on companies as well. What about Yum Brands? I mean, they have household names, KFC, Taco Bell. What happened to them?

  • PLATT:

    So, Yum was one of the most interesting companies. So, they've had a few scandals in China, not necessarily their own doing, but, you know, avian flu and some products found in their food that you wouldn't expect in a KFC meal.

    And what they decided to do is split the company to two, and then with some of that cash pay back shareholders. So, if I'm a bondholder in Yum Brands, I'm suddenly dealt with the less-profitable slower growth company and suddenly, I have a lot more risk in my plate than when I invested, you know, four years ago and I thought this is a stellar growth story in China.

  • SREENIVASAN:

    Right. And there were also movements in the retail sector, Neiman Marcus went public this year, but there were some troubles with Macy's, Nordstrom, et cetera, right?

  • PLATT:

    Yes. So, Neiman's filed to go public and then, suddenly, you saw Nordstrom same-store sales drop, Macy's' same-store sales drop. And the question at first was, maybe the luxury sector is fine. Maybe it's just the lower tier.

    As soon as you saw Nordstrom hit, you saw the same concerns flash to Neiman Marcus because they've got a lot of debt. And if same-store sales are slowing, how are they going to actually, you know, service that debt? How are they going to pay bondholders?

  • SREENIVASAN:

    OK. So, what are you looking forward to in 2016?

  • PLATT:

    So, one thing when we talk to investors, they say a lot is priced into the market already. You see a steep sell-off. People are expecting defaults to increase. So, perhaps we could be at a bottom. No one wants to catch a falling knife, though. So, there's a lot of fear at year's end that we've seen a few bonds that were meant to price this year get postponed to next year just because investors aren't coming to the table.

    That said, you will see defaults increase. Most people, like the rating agencies when you talk to them, they say the issue starts in 2018 and 2019 when there are massive maturity rolls coming up. You know, hundreds of billions of dollars in debt that's due.

    And the question is can these companies continue to roll them over, like you could refinance your mortgage, or are they going to be stuck paying the bills? And if they don't have the cash around, will we see defaults?

  • SREENIVASAN:

    Eric Platt from "Financial Times" — thanks so much for joining us.

  • PLATT:

    Thanks for having me.

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