Wendy has been beating the drum in a number of her posts that as interest rates are ratcheted up, companies that rely on junk bond financing will start to default and potentially go under. I think she refers to them as “zombies”.
This WSJ article tells the story of this starting to unfold - just as Wendy told us it would.
Financial pain is spreading in the junk-loan market, showing how interest-rate increases are hurting debt-laden companies and worrying investors that a credit crunch looms as the economy slows.
Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020, when pandemic shutdowns hobbled the U.S. economy, according to Fitch Ratings. The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say.
Interest payments on the loans float in lockstep with benchmark interest rates set by the Federal Reserve. The higher the central bank raises rates, the tighter the squeeze on companies that borrowed when rates were close to zero.
Companies at higher risk of default run the gamut from mattress maker Serta Simmons Bedding LLC to software company Avaya Holdings Corp. and restaurant-equipment supplier TriMark USA LLC, according to Fitch.
Companies with single-B ratings—one of the lowest rungs in the junk-debt category—now account for about one-quarter of leveraged loans outstanding, compared with 11% in 2010, said Frank Ossino, manager of a leveraged-loan fund at Newfleet Asset Management.
The trend is accelerating. Around twice as many loans received credit-rating downgrades as upgrades in the past three months, the highest multiple since October 2020, according to research by Bank of America. Downgraded companies included eye-care company Bausch & Lomb Corp. and Cream of Wheat maker B&G Foods Inc.
More at this link.
I wonder how many zombies are out there?
- look out below