"This Is A Very Scary Scenario": Restructuring Legend Warns Of Coming "Perfect Storm"

Two months ago, we brought to your several very concerning quotes from some of the nation's top restructuring bankers, of which the direst warning came from Bill Derrough, the former head of restructuring at Jefferies and the current co-head of recap and restructuring at Moelis who admitted that: "I do think we're all feeling like where we were back in 2007. There was sort of a smell in the air; there were some crazy deals getting done. You just knew it was a matter of time."

What he is referring to is not just the overall level of exuberance, but the lunacy taking place in the bond market, where CLOs are being created at a record pace, where CCC-rated junk bonds can't be sold fast enough, and where the yield-starved generation of investors who have never seen a fair and efficient market without Fed backstops, means that the coming bond-driven crash will be spectacular.

"Even if there is not a recession or credit correction, with the sheer volume of issuance there are going to be defaults that take place," said Neil Augustine, co-head of the restructuring practice at Greenhill & Co. He is right: as we showed recently using the following chart from Credit Suisse, after languishing around 1%-2% for years, default rates have jumped the most in 5 years, and are now "ticking higher".

(Click on image to enlarge)

Fast forward to today when another Wall Street legend, Jim Millstein, the banking veteran who was the restructuring chief at the U.S. Treasury Department during the 2008 financial crisis and who yesterday agreed to sell his restructuring firm to Guggenheim Partners,  said the next economic downturn could now strike in less than two years, and in an interview with Bloomberg TV, warned that the US trade wars currently being waged are likely to "reduce business investment, increase costs to consumers and producers in the U.S. and reduce the sales opportunity for U.S. producers".

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