(Bloomberg) — A heap of distressed debt is expanding in the US corporate bond market and investors worry that a burst of defaults will follow.
The amount of dollar-denominated bonds and loans trading at levels indicating distress is the largest since September 2020, reaching $271.3 billion last week after five straight weeks of growth, according to data compiled by Bloomberg.
Companies that binged on low-cost borrowing in recent years are facing the prospect of refinancing at exorbitant yields — if they can find any investors — as the Federal Reserve raises rates to battle persistent inflation, threatening to push the economy into recession. Some market participants see distress leading to default, and for some companies, bankruptcy.
“You’re going to see a lot more distressed companies borrowing at a much higher rate,” said Jordana Renert, a restructuring lawyer with Lowenstein Sandler. “I don’t think it’s going to be everybody falling off a cliff — I think it’s going to sort of be a slow movement, an uptick in the bankruptcy cycle.”
The growing volume of troubled debt — defined as bonds trading at yields at least 10 percentage points above Treasuries, or loans changing hands at less than 80 cents on the dollar — shows investors are demanding a higher return for holding on to the debt of risky enterprises.
A case in point is Carnival Corp., with more than $8 billion of debt obligations trading at distressed levels, according to data compiled by Bloomberg. The cruise company managed to sell $2 billion of bonds earlier this month to refinance some of its debt, but paid a yield of 10.75%. Carnival last year sold bonds at yields as low as 6%.