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Pimco sees defaults rising in Asia as stimulus is wound back

Sydney

COMPANY debt defaults are set to rise as policymakers cut back on widespread support and shift towards more targeted pandemic spending, according to Pacific Investment Management Co (Pimco).

Trillions in government and central bank spending have shielded a majority of companies from the worst of the epidemic but this may not continue, said Robert Mead, Pimco's co-head of Asia-Pacific portfolio management in Sydney.

"The next phase of policy will be much more targeted" globally, Mr Mead said. For companies that are too highly leveraged or struggling to conduct business in a post-pandemic world, "we think a lot more of those will be allowed to fail".

From Goldman Sachs Group Inc to Moody's Investors Service, analysts are warning that debt delinquency could rise as a drawn-out pandemic chokes off demand and dries up businesses' cash flow. Policy makers including the Federal Reserve have pledged to keep stimulus pumping for as long as needed to sustain growth.

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The trend may already be underway: a growing number of Asian firms are deferring their bond payments on mounting financial stress, while a rising number of investment-grade companies are slipping into junk territory.

"You can almost count on one hand the number of defaults that are taking place around the world, and we think that the potential for high-yield defaults to potentially be double digit," said Mr Mead.

He points to Australia's example where new measures to safeguard jobs will be offered at a lower rate.

"There's an unrealistic assumption that the policy will save every company," he said. "Policy will be much more selective, much more targeted going forward and that will have implications for every section of the economy globally."

Pimco likes well-managed investment grade companies which understand their leverage, he said. It also favors new distressed debt deals as their covenants are such that they tend to offer better protection. BLOOMBERG

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