America’s $1.4tn risky corporate loan market has been hit by the biggest slew of downgrades since the depths of the Covid crisis in 2020, as rising borrowing costs strain businesses piled high with floating-rate debt. US junk loan downgrades numbered 120 in the quarter to June, according to an analysis by JPMorgan, amounting to $136bn — the highest total in three years.
Leveraged loans are issued by heavily-indebted companies with non-investment-grade credit ratings, and typically have floating coupons that move with prevailing interest rates. Some of the US companies that have been downgraded in recent weeks include Aspen Dental Management, MedData and investment software company Confluence Technologies.
The diminishing credit quality of junk loans follows the market’s explosive growth in recent years. Companies and private-equity backers loaded up on this type of debt when borrowing costs were ultra-low during the pandemic. The asset class swelled beyond the size of the longer-established high-yield bond market and became a critical mainstay for risky borrowers.
But the companies now face the daunting task of repaying lenders in an environment of much higher interest rates since the Federal Reserve began raising rates in March 2022. “There’s an immediate impact on their entire capital structure, their entire debt liability stack, as soon as rates move”, said Steve Purdy, head of credit research at asset manager TCW.
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Source: www.ft.com
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