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DISTRESSED DAILY: Bankruptcy Guru Altman Says It’s Crunch Time

DISTRESSED DAILY: Bankruptcy Guru Altman Says It’s Crunch Time

(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.”