新冠疫情爆发后，美联储紧急启动降息将借款成本降至接近零的水平，这使得杠杆贷款的浮动利率尤为有吸引力，一些“垃圾级”企业在疫情期间利用这些廉价资金大举发债，而随着利率持续在高位水平，它们正面临债务违约和破产保护的困境。High interest rates continue to squeeze profits, with the default rate on loans from high-risk Global enterprises (mainly USA companies) climbing to its highest level since 2020, while investor demand remains strong.
High borrowing costs increase the repayment pressure on enterprises, causing the default rate in the USA's junk loan market to soar.
A recent report from the rating agency Moody's shows that the default rate of global leveraged loans (mostly in the USA) rose to 7.2% for the 12 months ending in October, reaching the highest level since the end of 2020, primarily due to highly-leveraged enterprises continually suffering from a high interest rate environment.
After the outbreak of the COVID-19 pandemic, the Federal Reserve urgently cut interest rates, bringing borrowing costs down to nearly zero, which made the floating rates of leveraged loans particularly attractive. Some 'junk-grade' companies took advantage of this cheap funding to issue bonds during the pandemic, but as interest rates remain high, they are facing the dilemma of debt defaults and bankruptcy protection.
David Mechlin, the portfolio manager for Crediting at UBS Group Asset Management, stated:
"A large number of Bonds were issued in a low-interest environment, while the pressure from high interest rates is gradually becoming apparent over time."
"This trend of defaults may continue until 2025."
Data shows that many enterprises facing defaults have turned to distressed asset exchanges (such as Debt-for-equity Swaps and discounted repurchases of debts) to avoid bankruptcy. Ruth Yang, head of private market analysis at S&P Global Ratings, stated that such transactions accounted for more than half of this year's default transactions, setting a historical record.
The structural changes in the leveraged loan market have increased default risks.
Some view that the higher default rates are a result of changes in the leveraged loan market in recent years.
Mike Scott, a senior fund manager at Investec Group, believes that many new borrowers come from industries such as Medical Care and Software, which have relatively light corporate Assets, meaning that in the event of a default, investors may only be able to recover a small portion of their investments.
"The leveraged loan market has experienced ten years of unlimited growth."
Despite the rising default rates, the credit spreads for junk Bonds remain at historically low levels. According to statistics from Bank of America, this spread is at its lowest level since the 2007 financial crisis, indicating that investor demand for junk Bonds remains very strong.
Some fund managers analyze that considering the Federal Reserve is currently gradually lowering the benchmark interest rate, the surge in default rates will be temporary.
Brian Barnhurst, global head of Credit Research at PGIM, states that as the Federal Reserve begins its rate-cutting cycle, the reduced borrowing costs should provide comfort to companies that previously issued junk Bonds.
"We have not seen any type of Asset's default rates rise."
To be honest, the relationship between the default rates of leveraged loans and High Yield Bonds may have diverged by the end of 2023 and is no longer as synchronized.
Editor/ping