Living in the tropics offers a front-row seat to the dramatic arrival of tropical storms. To those unacquainted, such storms might appear menacing, but they typically signal their arrival well before the heavy rains start.
The calm, warm air shifts, indicating the impending upheaval, and these are the subtle but noticeable first indicators of a tropical storm. The sky then turns from a calm blue to foreboding gray tones, signalling the arrival of the storm's first silent warning.
The wind increases in strength along with the storm, going from light gusts to strong gusts that rustle the trees and leaves and indicate how bad the storm will be.
The natural elements reach their climax not with a rapid start but rather with a gradual, gentle rain that gets stronger and fills the air with thunderous claps and rhythmic pattering.
The calm before a storm
This storm's anticipated pattern is eerily similar to the state of the financial markets right now.
The US economy appears strong on the surface, but there are underlying indicators of distress that resemble tropical storm warnings.
Some of these worries were recently brought to light by Moody's Ratings, which downgraded the outlook from stable to negative for direct lending funds managed by notable companies including FS Investments, Oaktree Capital Management and BlackRock.
These institutions, whose total assets surpass $20bn, have seen a rise in loans that are in non-accrual status, putting them in danger of suffering large losses.
The rising trend in debt levels is a cause for concern. The public and private sectors are exposed to economic risk as a result of their huge debt accumulation.
Delinquency and default
Furthermore, we are seeing increased delinquency rates, which indicates that more borrowers are not fulfilling their loan obligations. This is concerning since it may indicate a future rise in bankruptcies and foreclosures.
It is worth noting the number of repeat defaulters - those who have defaulted on their loans more than once - is also growing. This clearly indicates ongoing financial distress among borrowers, threatening the stability of the economy.
Moreover, there has been a spike in rating downgrades in the financial landscape, indicating a decline in corporate creditworthiness.
In a higher-for-longer interest rate environment, concerns about the ability of highly leveraged corporates to service their debt are not unfounded. Indeed, default rates are trending higher.
Hold onto your hats.
Maryann Umoren Selfe is head investment solutions at Banque Internationale à Luxembourg Suisse and writes in a personal capacity. Opinions expressed do not represent the opinions of BIL or BIL Suisse.
