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Distressed debt ranges double in US company bond market

Investors have began backing away from the riskiest company bonds within the US, with the quantity of debt that trades at distressed ranges doubling because the begin of the 12 months.

The worth of junk bonds buying and selling for 70 cents on the greenback or much less, thought-about an indication of misery and a warning that an organization could wrestle to repay money owed, has climbed to $27bn from about $14bn on the finish of 2021, in line with FT calculations based mostly on a broadly watched index run by Ice Data Services.

The improve displays a extra hawkish Federal Reserve, which first lifted rates of interest in March and is anticipated to achieve this once more on Wednesday, the start of a forecast string of charge rises meant to fight US inflation.

The central financial institution’s pivot additionally comes alongside the battle in Ukraine and slowing international progress, clouding the image for extra indebted firms which will wrestle to refinance their borrowings at larger rates of interest.

Marty Fridson, chief funding officer of Lehmann Livian Fridson Advisors, stated that whereas the quantity of debt buying and selling at distressed ranges remained low, “it’s starting to move up, and I would expect it to continue to rise. That’s significant.”

Further financial tightening by the Fed will push extra debt into the distressed zone, he added.

The accumulation of distressed debt excellent comes after the worst month for the US high-yield bond market because the pandemic-triggered sell-off in March 2020, with a broadly adopted Ice Data Services index down 3.6 per cent in April.

Another measure of misery — the share of debt buying and selling with a yield of 10 share factors or extra above equal US authorities bonds — has additionally risen, led by client and communications firms, in line with information from UBS.

Retail expertise firm Diebold Nixdorf’s bonds maturing in 2024 slid sharply in April, pushing up its yield from about 10 per cent at the beginning of that month to 27 per cent on Tuesday.

The yield on pharmacy chain Rite Aid’s $850mn bond maturing in 2026 has been rising all 12 months, reaching near 13 per cent on Tuesday, up from about 7.3 per cent on the finish of 2021.

Some buyers stay sanguine concerning the dangers forward, noting that many lower-rated firms have taken the chance to boost money, extending the maturity of their debt and making them much less reliant on new cash.

However, UBS analyst Matt Mish famous the variety of firms that face elevated borrowing prices will increase sharply for bonds buying and selling above an all-in yield of 10 per cent. More than 8 per cent of the US high-yield bond market is now above this degree.

“The weakness is broadening out,” he stated. “It tells you that at the margin, this is not just a rates issue, it’s also a credit issue. There are not many companies that can finance at north of 10 per cent for a sustained period of time.”

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