Hurricane Katrina's Impact on Leveraged Loan and High Yield Bond Markets

The devastating impact of Hurricane Katrina has left a trail of destruction and economic uncertainty in its wake, as players in the leveraged loan and high yield bond markets assess the potential long- and short-term damage to the markets. While Moody's Investors Service expects few downgrades in the short term, certain industries such as airlines and automotive are under pressure due to higher fuel prices. In the longer term, the impact of the disaster on economic growth and consumer spending could have a dampening effect on air travel and lead to a decrease in demand for automobiles.

Key Takeaways:

• Moody's Investors Service expects to downgrade few companies in the short term due to the hurricane, but certain industries such as airlines and automotive are under pressure.
• Higher fuel prices could put additional pressure on airlines' liquidity and cost them business if travel declines.
• Automotive suppliers and manufacturers could be under added pressure due to higher costs of raw materials and a decline in consumer confidence.
• The degree of impact on OEMs is contingent upon the storm's impact on fuel prices and the overall economy.
• Industries such as retail, hospitals, gaming, utilities, and hospitality could be impacted in the short term, while industries involved in rebuilding efforts could see an increase in profits.
• The high yield and leveraged loan markets heated up last week after the August lull, but there has been limited hurricane-related trading activity.
• Market players are concerned about the potential acceleration of the default rate for speculative grade issuers.
• Fitch Ratings' Mariarosa Verde believes that Katrina has the potential to accelerate the already-anticipated rise in the default rate for speculative grade issuers.

Statistics:

• Moody's has placed only a few issuers on review for possible downgrade as a result of the storm.
• The ratings agency expects the default rate for speculative grade issuers to rise over the course of the next year.
• Fitch Ratings predicts that the default rate has reached a cyclical low and will rise in the coming year.
• The default rate for speculative grade issuers could be pushed up quickly by negative catalysts such as high energy costs.
• The hurricane has raised concerns about the potential for a hiatus in interest rate increases by the Federal Reserve Board.

Sources:

• Moody's Investors Service
• Standard & Poor's
• FridsonVision LLC
• Fitch Ratings
• Bank Loan Report and SourceMedia, Inc.