Beware: Leveraged junk loans are defaulting at the fastest rate in four years, according to Financial Times.
“Defaults in the global leveraged loan market—the bulk of which is in the U.S.—picked up to 7.2% in the 12 months to October, as high interest rates took their toll on heavily indebted businesses, according to a report from Moody’s. That is the highest rate since the end of 2020.”
What’s a “leveraged junk loan?” you might wonder. FT explains: “Because leveraged loans—high yield bank loans that have been sold on to other investors—have floating interest rates, many of those companies that took on debt when rates were ultra low during the pandemic have struggled under high borrowing costs in recent years…. In the U.S., default rates on junk loans have soared to decade highs, according to Moody’s data.”
Or, in layman’s terms, banks sold junk in their portfolios up the food chain to other speculators, who are now left holding the bag on the original non-performing loans.
“Many of these defaults have involved so-called distressed loan exchanges. In such deals, loan terms are changed and maturities extended as a way of enabling a borrower to avoid bankruptcy, but investors are paid back less.
“Such deals account for more than half of defaults this year, a historical high.”
