US junk loan defaults rise amid tightening of monetary policy
The defaults in the US junk loan market have increased this year, totaling $21bn across 18 companies between January and May alone. This number is higher than the total defaults recorded in 2020 and 2021 combined. As the US Federal Reserve continues its interest rate hike campaign, risky companies with high borrowing costs are facing increased pressure. With an increase in defaults amid the tightening of monetary policy, companies with large debts and low ratings are dealing with the aftermath of loading up with leveraged loans while the Fed cut rates to close to zero during the COVID-19 crisis.
Other News
– Former US President, Donald Trump, is expected to appear before a federal court in Miami on charges of conspiracy to obstruct justice and mishandling of confidential documents.
– France is urging the support of a global greenhouse gas emissions tax on shipping ahead of a summit hosted by President Emmanuel Macron this month asking the United Nations International Maritime Organization to agree on the levy at next month’s meeting.
– Germany’s Commerzbank is considering a second, larger share buyback after half-year results are announced in early August.
– Infineon is considering moving more production to the United States to comply with the Inflation Reduction Act, which has requirements relating to the value of American-made goods.
Deep Dive
As fears of espionage and geopolitical tensions are driven by the submarine cable market, the world’s oceans risk being split into Eastern and Western blocs. With almost 1.4 million kilometers of metal-clad fiber in use, facilitating seamless Internet traffic around the globe, the US seems to be pushing China out of the infrastructure that underpins the internet.
Additional Piece: The Cost of Corporate Debt Defaults
The COVID-19 pandemic has served as a wake-up call for inactive companies regarding their financial risks and debt management. With the global economic slowdown and the pandemic’s impact on operations, many companies had to go to the market for funds. Corporate debt has risen above pre-COVID-19 levels. Defaults on corporate debt were already on the rise before the pandemic, and since its onset, cross-industry defaults have gained pace.
Defaults not only result in large losses for the lenders, it can also have adverse impacts on the overall market. As credit cycle risks become more complex, the default of a single company can trigger a chain reaction that can adversely impact the economy.
Corporate debt default rates are influenced by the severity of the economic shock and the overall quality of the borrower. The COVID-19 crisis led to greater problems for companies with weak financial records as they found it challenging to access credit markets. These companies often have higher levels of leverage and show significant vulnerability when the economy slows down. Consequently, the Federal Reserve has played an essential role in reducing the risk of contagion by deploying strategies like stabilizing the money markets, introducing liquidity measures and providing access to various credit facilities.
However, despite the safeguard mechanisms put in place by the government and the Federal Reserve, the possibility of companies defaulting remains. A corporate bond default can lead to higher borrowing costs and the loss of shareholder value, which can negatively affect the overall economy. With increasingly complex financial structures and weaker credit metrics, handpicking companies with strong financial profiles can help investors to avoid highly-leveraged debt-laden companies and mitigate risks of default.
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Defaults in the $1.4 trillion US junk loan market have risen sharply this year while the Federal Reserve’s aggressive interest rate hike campaign increases pressure on risky companies with “fluctuating” borrowing costs.
There were 18 debt defaults in the U.S. loan market between January 1 and the end of May totaling $21 billion, more in number and total value than in the entirety of 2021 and 2022 combined, according to a analysis of Goldman Sachs data from PitchBook LCD.
Three defaults totaling $7.8 billion were recorded in May alone, the highest monthly dollar amount since the depths of the Covid-19 crisis three years ago.
The bankruptcies underscore the pressure on low-rated companies with large piles of debt as they bear the brunt of the US central bank’s tighter monetary policy to curb high inflation.
Many “junk” rated companies loaded themselves with leveraged loans – debt with variable borrowing costs that move with prevailing interest rates – when the Fed cut rates close to zero at the height of the Covid crisis. Issuance nearly doubled between 2019 and 2021 to $615 billion, data from PitchBook LCD shows.
Here’s what else I’m keeping an eye out for today:
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UK Covid Survey: A wide-ranging investigation is underway, destined to last at least until 2026 his first public hearing.
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Accuse Trump: The former US president is expected to appear in federal court in Miami criminal charges against him of conspiracy to obstruct justice and mishandling of confidential documents.
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Economic data: OPEC releases its monthly oil report, Germany releases inflation data for May and has the results of a Zew economic sentiment survey. The US also has last month’s consumer price index, while the UK has labor market data for the same month.
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Andrew Bailey: The UK’s top central banker is expected to testify at a session of the House of Lords’ Economic Affairs Committee entitled ‘Bank of England: How does independence work?’
The FT Women in Business Summit Europe goes live online and in London today. Hear from leaders of BP, Beauty Pie, Harvey Nichols and more.
Five more top stories
1. MPs to test UK financial watchdog over its handling of misconduct complaints about Crispin Odey after a Financial Times report into the allegations of 13 women prompted the Financial Conduct Authority to expand an existing investigation into her firm. Regulator leadership is he is expected to appear before the Treasury Select Committee by the end of next month.
2. Large accounting firms should increase the pay of junior auditors if they want to make the sector more attractive to young hires, don’t blame it on a strict regulatory approach, according to the chairman of the UK’s Financial Reporting Council. Read the full FT interview with Sir Jan du Plessis.
3. France is urging support for a global tax on greenhouse gas emissions from shipping ahead of a summit hosted by President Emmanuel Macron this month, asking members of the United Nations International Maritime Organization to agree the levy at next month’s meeting. Read the full story.
4. Exclusive: Germany’s Commerzbank hopes to announce second, larger share buyback after half-year results they’re announced in early August, the bank’s chief financial officer told the FT. Here’s Why Bettina Orlopp Thinks Buybacks ‘Make Perfect Sense’.
5. Exclusive: Infineon is considering moving more production to the United States to comply with the Inflation Reduction Act, which has requirements relating to the value of American-made goods. Read more about the German chipmaker’s move.
Deep dive
Nearly 1.4 million kilometers of metal-clad fiber crisscross the world’s oceans, speeding seamless Internet traffic around the globe. But driven by fears of espionage and geopolitical tensions, the submarine cable market risks splitting into Eastern and Western blocs, experts say. The FT explores what the United States is like pushing China out of the infrastructure underpinning the internet in this visual story.
We are also reading. . .
Chart of the day
With the Russian invasion of Ukraine leading to a sharp increase in defense spending and rising geopolitical tensions over Taiwan, economists have once again turned their attention to an age-old question: how to pay for wars.
Take a break from the news
What’s the best way to see Venice? To escape the crowds of tourists, FT travel editor Tom Robbins drove a chartered boat to explore the Italian city and its lagoon on a journey of unexpected delights and moments of blissful solitude.
Further contributions by Benjamin Wilhelm e Gordon Smith
https://www.ft.com/content/7697bd1d-a442-4c62-a277-252c137c18ee
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