The possibility that the central bank won’t switch to lowering rates next year is increased by the robustness of the US labour market. That has a significant negative impact on corporate America, which has increased its debt levels despite rising yields over the past year.
Amounts of dollar-denominated junk debt issued by businesses that are due to mature before the end of 2025 total about $425 billion, and market yields on speculative-grade bonds are currently at least three percentage points higher than the average coupon that borrowers are paying on their existing debt.
The higher borrowing costs that many businesses must pay could reduce profits and raise the likelihood of default. According to Mohamed El-Erian, the senior economic adviser at Allianz SE, rates remaining higher for a prolonged period of time will probably have some unanticipated effects on the economy.
After the US jobs report was released on Friday, El-Erian predicted terrible news for the markets and the Fed. Something will probably go wrong, most likely in the financial markets, but it will eventually affect the economy as well.
According to data collated by Bloomberg News, even before the jobs report, concerns about rising rates had stopped fresh junk bond sales in the US, resulting in the first “zero” week since the week ending on August 18. That occurred as the 30-year US Treasury bond this week crossed the 5% threshold for the first time since 2007, which made clear exactly how difficult and costly it will be for some issuers to manage their debt.
Althea Spinozzi, a strategist at Danish lender Saxo Bank, stated that the junk bond market “needs to massively reprice to account for refinancing risk with benchmark borrowing rates so high.” I don’t see how the default rate won’t increase significantly, and balance sheets will be stretched everywhere.
Thinking along those lines contributed to the average yield on the Bloomberg Global High Yield index rising this week to 9.26%, the highest level since November of last year and almost twice as high as it was at the beginning of 2022. The lack of fresh sales came after September, which was the strongest month since January 2022, saw more than $23 billion in issuance.
Selling debt is more challenging due to rising yields and economic uncertainty. Barclays Plc had preliminary conversations with investors about refinancing a private loan for Hibu Inc., the former publisher of the Yellow Pages, but the project was shelved due to lukewarm interest from loan buyers. Separately, a sale of a portfolio of leveraged loans from Europe valued at €290 million ($305 million) was postponed.
The pain of refinancing at higher yields is already being felt by many loan debtors because benchmarks for floating-rate loans have been steadily rising since last year. According to Sinjin Bowron, portfolio manager at Beach Point Capital, borrowers of trash bonds have a larger chance of having to considerably increase their coupons if rates remain higher for a longer period of time.
More defaults are likely to occur in the quickly expanding corporate private credit market as well; according to Bank of America Corp. strategists, default rates there could exceed those in the syndicated loan market by 5% the following year.
Companies who had intended to enter the market with hazardous bonds and loans will undoubtedly reconsider, at least in the short future.
According to Winnie Cisar, global head of strategy at CreditSights Inc., “Credit markets are likely to remain under some modest pressure through early November,” and “earnings blackouts and materially higher borrowing costs should keep issuance fairly limited through October.”
Following what was expected to be the worst week for the credit markets since the global banking crisis in March, a positive jobs report on October 6 caused Treasury rates to spike to their highest levels since 2007 and further hurt corporate borrowers.
In a bid to secure the transaction, private credit funds are competing with banks to finance Carlyle Group Inc.’s potential acquisition of several Medtronic Plc. units.
For its intended acquisition of NextGen Healthcare Inc., Thoma Bravo is nearing a about $1 billion financing package from a group of private credit lenders.
Among the private credit lenders supporting Cinven’s acquisition of Synlab AG with €500 million ($526 million) in subordinated debt are Apollo Global Management and CVC Capital Partners.
The Kleinfelder Group Inc. was purchased by Lindsay Goldberg & Bessemer with the help of a $505 million loan from a group of private credit lenders headed by Oak Hill Advisors.
To support the potential purchase of the UK’s Iris Software in payment-in-kind debt, private credit funds are trying to contribute around a fifth of an up to £1.25 billion ($1.5 billion) funding.
In order to help fund the merger of Virgin Pulse and HealthComp Holding Co., Blackstone Inc. invested $1.5 billion.
To capitalise on the $1.5 trillion market’s explosive growth, T. Rowe Price Group Inc. and Oak Hill Advisors are launching a new private credit fund that is accessible to US individual investors.
One of the fastest-growing ESG investment methods in the US will be offered by a new fund that BlackRock Inc. is launching by utilising the private credit market.
Due to skyrocketing interest rates, private credit funds have recently enjoyed a financial bonanza, but some of its investors are beginning to wonder if they truly deserve to get such a large portion of the windfall.
Even if public credit markets have recently regained some vigour, according to KKR & Co., more investors are now permanently allocating to private credit along with other fixed-income assets.
Sunac China Holdings Ltd. overcame the final major obstacle to become the nation’s first significant developer to restructure such obligations when the court approved its multibillion-dollar offshore debt restructuring plan.
China SCE Group Holdings Ltd. announced that after failing to make a $61 million loan payment, it will hire outside counsel and consider a comprehensive debt plan.
In Motion
John Maggiacomo, the head of US credit sales at RBC Capital Markets, left the company after six years.
Nikunj Gupta is now the head of credit structuring at HSBC.
Tiffany Gallo, the managing director of Apollo Global Management Inc., has left the company.
For its private credit business, Navis Capital Partners hired Jack Ng as a director headquartered in Singapore.
Omar Ghalloudi, a seasoned debt trader, left Credit Suisse Group AG for boutique investment firm KNG Securities in London.