Distressed debt levels double in US corporate bond market

Buyers have began backing away from the riskiest company bonds within the US, with the quantity of debt that trades at distressed ranges doubling for the reason that begin of the 12 months.

The worth of junk bonds buying and selling for 70 cents on the greenback or much less, thought-about an indication of misery and a warning that an organization might battle to repay money owed, has climbed to $27bn from about $14bn on the finish of 2021, based on FT calculations primarily based on a broadly watched index run by Ice Information Companies.

The rise displays a extra hawkish Federal Reserve, which first lifted rates of interest in March and is anticipated to take action once more on Wednesday, the start of a forecast string of charge rises meant to fight US inflation.

The central financial institution’s pivot additionally comes alongside the battle in Ukraine and slowing international development, clouding the image for extra indebted firms which will battle to refinance their borrowings at increased rates of interest.

Marty Fridson, chief funding officer of Lehmann Livian Fridson Advisors, mentioned that whereas the quantity of debt buying and selling at distressed ranges remained low, “it’s beginning to transfer up, and I’d count on it to proceed to rise. That’s important.”

Additional financial tightening by the Fed will push extra debt into the distressed zone, he added.

The buildup of distressed debt excellent comes after the worst month for the US high-yield bond market for the reason that pandemic-triggered sell-off in March 2020, with a broadly adopted Ice Information Companies index down 3.6 per cent in April.

One other measure of misery — the share of debt buying and selling with a yield of 10 share factors or extra above equal US authorities bonds — has additionally risen, led by client and communications firms, based on information from UBS.

Retail expertise firm Diebold Nixdorf’s bonds maturing in 2024 slid sharply in April, pushing up its yield from about 10 per cent in the beginning of that month to 27 per cent on Tuesday.

The yield on pharmacy chain Ceremony Support’s $850mn bond maturing in 2026 has been rising all 12 months, reaching near 13 per cent on Tuesday, up from about 7.3 per cent on the finish of 2021.

Some traders stay sanguine concerning the dangers forward, noting that many lower-rated firms have taken the chance to lift money, extending the maturity of their debt and making them much less reliant on new cash.

Nonetheless, UBS analyst Matt Mish famous the variety of firms that face elevated borrowing prices will increase sharply for bonds buying and selling above an all-in yield of 10 per cent. Greater than 8 per cent of the US high-yield bond market is now above this stage.

“The weak point is broadening out,” he mentioned. “It tells you that on the margin, this isn’t only a charges concern, it’s additionally a credit score concern. There usually are not many firms that may finance at north of 10 per cent for a sustained time frame.”