(Bloomberg) -- In junk debt markets, things are going to get worse before they get better, according to Dr. Edward Altman.
The New York University professor emeritus is known for his pioneering work on distressed debt and creating the Altman Z- score formula that predicts the likelihood that a company will go bankrupt. Right now, he says, more busts seem very likely indeed.
“Certainly I expect more firms to require expert advice on possible restructuring, given the precarious state of the markets and reduced earnings prospects,” Altman said in an interview. “And I am sure that the number of bankruptcies will spike, some quite soon, due to the virus and, for certain companies, due to the decrease in oil prices.”
Some market participants have said this week that they’ve had trouble getting trades done on high-yield securities. That’s in line with what Altman sees. “Distressed or risky debt prices are highly illiquid, with huge bid-ask spreads, in highly volatile markets -- especially since dealers don’t carry much, or any, inventory these days,” Altman said.
Investors’ complacency in recent years led to a build-up of risk: “In recent years, the problem was that investors were too risk tolerant, ignoring or not fully pricing in these risks, given the low-interest rate environment,” he said. “That’s the reason spreads have widened so much, and default estimates have risen.”
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