The $1 trillion of high yield debt that’s piled up in the last 5 years is about to have a ‘day of reckoning,’ Bank of America says
Aug 18, 2023, 11:05 AM EDT
- There’s around $1 trillion of private debt that’s headed for potential trouble, Bank of America warned.
- Most of that debt has been created by below-investment grade companies through high yield loans or bonds.
- Around $400 billion assets are considered to be in “pre-distress,” while $150 billion assets are “deeply distressed.”
There’s a mountain of high-yield debt that could be at risk, according to Bank of America.
The bank estimated around $1 trillion of high yield debt has been accumulated by companies over the past five years, which has largely been created by below-investment grade corporations. Around 25% consists of below-investment grade firms issuing risky high-yield bonds, while 35% consisted of broadly syndicated loans taken out by below-investment grade companies, the bank said. The remaining 40% was classified as private debt.
Furthermore, around half of that that debt faces some risk of potentially defaulting, which could spell trouble for markets.
“$1 trln in new leveraged credit last five years faces its day of reckoning,” Bank of America strategist Yuri Seliger said in a note on Friday. “Roughly half of this money is in currently well-performing capital structures, while the other half is now in various stages of stress,” he later added.
Around $400 billion of debt, for instance, is trading at rates over 6% – a range the bank classifies as “pre-distress,” since refinancing those debt assets could yield a coupon rate of 10% or higher. Another $150 billion of debt is considered to be “deeply-distressed,” since refinancing is no longer an option.
Other experts have warned of the dangers of mounting private and public debt levels in the US, particularly as markets exit an era of ultra-low interest rates and head into a new higher-for-longer rates regime.
US central bankers have raised real interest rates in the economy 525 basis-points to tame runaway inflation, which has significantly raised the cost of borrowing. Meanwhile, corporate defaults are surging, with total defaults in 2023 already surpassing last year’s total, according to Moody’s Investors Service.
Up to $1 trillion of corporate debt could be at risk of default if the US tips into a full-blown recession, Bank of America previously predicted, though strategists no longer see a recession as likely this year.
Source: Markets Insider
If you wish to contact the author of any reader submitted guest post, you can give us an email at UniversalOm432Hz@gmail.com and we’ll forward your request to the author.
All articles, videos, and images posted on Dinar Chronicles were submitted by readers and/or handpicked by the site itself for informational and/or entertainment purposes.
Dinar Chronicles is not a registered investment adviser, broker dealer, banker or currency dealer and as such, no information on the website should be construed as investment advice. We do not support, represent or guarantee the completeness, truthfulness, accuracy, or reliability of any content or communications posted on this site. Information posted on this site may or may not be fictitious. We do not intend to and are not providing financial, legal, tax, political or any other advice to readers of this website.
Copyright © 2022 Dinar Chronicles