Kazem Dahmash.CPA,MBA’s Post

https://lnkd.in/dAZFS8dd US companies are defaulting on junk loans at the highest rate since 2020, driven by high interest rates and refinancing struggles from pandemic-era borrowing. Defaults, often through distressed exchanges, are concentrated in the leveraged loan market due to floating rates and weaker covenants. Analysts warn that while falling Fed rates may bring relief, structural issues in loan agreements could prolong financial stress.

Some firms simply don't work with rates at these levels. To wit, "The rise in companies struggling to repay loans contrasts with a much more modest rise in defaults in the high-yield bond market, highlighting how many of the riskier borrowers in corporate America have gravitated towards the fast-growing loan market. Because leveraged loans — high yield bank loans that have been sold on to other investors — have floating interest rates, many of those companies that took on debt when rates were ultra low during the pandemic have struggled under high borrowing costs in recent years. Many are now showing signs of pain even as the Federal Reserve brings rates back down."

In the past year, US companies have defaulted on junk loans at the fastest rate in four years. According to Moody's, defaults in the global leveraged loan market, particularly in the US, have surged to 7.2% by October. This is the highest rate since 2020. Key Points: - High interest rates are proving costly for businesses that took on debt during the low-rate environment post-Covid. - Many companies are now grappling with high borrowing costs despite recent rate cuts by the Federal Reserve. - Distressed loan exchanges have become common, allowing companies to avoid bankruptcy but resulting in lenders being paid back less. - Over half of this year’s defaults have been due to distressed exchanges, marking a historical high. - Some fund managers are optimistic that the spike in defaults will be short-lived due to falling Fed rates. - Others caution that distressed exchanges may only delay underlying financial problems. 🔍 Keep following The Source. https://lnkd.in/dAZFS8dd #Finance #Economy #Loans #HighYieldBonds #Investing #Business

Leveraged loan default rates soar, which is not a surprise considering the weak security packages, the significant increase in interest rates and the deteriorating free cash flow. We should expect the private credit market to follow a similar path, but potentially with higher dispersion. #defaults #distrsseddebt #credit

Our Q4 High Yield and Bank Loan Outlook, titled “Fed Rate Cuts Are Positive for Leveraged Credit (With a Few Caveats),” explores the outlook for high yield corporate bonds and leveraged loans as the Federal Reserve cuts interest rates. While both high yield bonds and leveraged loans offer value, investors should prioritize quality, focusing on higher rated issuers and maintaining senior positions in the capital structure. https://lnkd.in/g9bJ7Dge

Annual loan defaults are soaring, with this year’s rate of 4.7% surpassing 4.5% seen during the economic slowdown in 2020 triggered by the advent of the pandemic. It also marks the highest default rate since the global financial crisis, when defaults peaked at 10.5%. The trailing 12-month (TTM) US leveraged loan default rate jumped to 4.72% in October, up from 2.99% a year ago, according to Fitch Ratings. More here: https://lnkd.in/deqWCyHT

With the Fed’s second rate cut this year coming amidst a continued rally in credit, credit investors are actively asking where to get returns going forward. With rates lower and spreads approaching historic tights, CLO issuance is on track for a record year, our Partner and Deputy CIO – Credit, John Cocke, recently spoke with Private Debt Investor about Corbin's outlook on where to find returns. John explained: “With rates coming down, you can no longer expect to make a double-digit return in CLO double-B’s. The world’s not ending, but the worry is, are people going to reach for yield?”   Read more here: https://lnkd.in/gtb_qv7x

Falling policy interest rates cannot reverse the global decline in CRE values since the pandemic, but they will ease refinancing risk and facilitate restructurings for some CRE-owning borrowers such as CRE CLOs with floating-rate loans that are currently or soon-to-be unhedged, including those nearing maturity. LEARN MORE: https://lnkd.in/eXZ2xvqb #cre #commercialrealestate #sasb #creclo #cmbs #fitchratings #fitch.

Q1 2024 has proven to be a successful time for businesses to refinance their near-maturity obligations. Overall, global issuances across the spectrum were up 0.9% and speculative grade borrowers were able to reduce their 2024 maturities by 17% while 2025 maturities were down 14%. S&P estimates, given the prevailing interest rate environment, refinancing activity could add 2% to investment grade borrowing costs while speculative grade borrowers could see 2.4% - 3.4% to their borrowing costs. While the market conditions and demand for debt securities was good in Q1, recent developments both domestically and abroad could prove problematic for issuers in Q2 along with 2H 2024.   https://lnkd.in/gJ--gnk6  

Moody's Data Reveals Leveraged Loan Defaults Approaching Covid Peaks This is a function of the end buyers not fully assessing the true risk of leveraged loans. They are either dumped in retail funds with benign sounding names like Bank Loan funds or buried in CLOs with inflated AAA ratings which are increasingly bought by retail ETFs. This article stands in stark contrast to the fever dreams the Leveraged Loan and CLO market seem to be having. Tight spreads and massive issuance are contrapuntal to actual credit performance data. Moody's continues to rate new CLOs and take minimal rating action despite dramatic credit deterioration. That defaults have reached the level they were during Covid when the Unemployment Rate was more than 2x the current level should be a wake up call. One shudders to think how performance will fare in a right and proper recession. This should wake the LL and CLO market out of their stupor but it won't. There is a long and unknown road to the edge of the cliff. Until the tires unmistakeably approach the edge, it will be Party on Wayne. #privateequity #debt #ratings #leveragedloans