May 23, 2023 - Economy

Over $100 billion of U.S. corporate debt trades at distressed levels

Note: Includes U.S. high-yield corporate bonds trading below 60 cents on the dollar and leveraged loans below 75; Data: BofA Global Research; Chart: Axios Visuals

The amount of U.S. corporate debt trading at distressed levels is at a level rarely seen over the last decade.

Why it matters: We’re all on the lookout for signs of a deeper “credit crunch” as a result of the Fed’s historic rate-hiking campaign.

  • So far, what we're seeing is a growing bifurcation in the credit markets: For reasonably healthy companies, credit is widely available (though more costly than a year ago) — but for already struggling companies, credit is fast drying up.

What they’re saying: “Market access is wide open to higher-quality [companies] … And yet capital is getting severely constrained in areas where issuers overindulged on credit in recent years,” BofA Global Research credit strategist Oleg Melentyev wrote in a report on Friday.

  • Moody’s Investors Service adds that high rates, slowing growth and sticky inflation “will uncover pockets of financial vulnerability” — making it harder for low-rated companies to refinance and leading to rising defaults.

Zoom out: Last week offered visible examples of both of these diverging trends — the week started with an unusual flurry of large bankruptcies; it also wound up being one of the busiest weeks of the year for deals in the investment-grade bond market, where higher-quality companies borrow money.

The bottom line: Though markets are functioning pretty well now — especially considering the recent string of bank failures — “pressures remain under the surface,” Melentyev wrote.

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