FT | Junk loan defaults hit 7.2%, highest since 2020

What's new: U.S. companies are defaulting on leveraged loans at a 7.2% rate, the highest level in four years, as they struggle to refinance debt taken during the pandemic's low-rate era.

Why it matters: Despite the Fed beginning to cut rates, many companies that borrowed cheaply during Covid are now buckling under high interest costs, signaling potential widespread financial distress.

The big picture: The surge in defaults contrasts sharply with the relatively stable high-yield bond market, highlighting how riskier borrowers have concentrated in the floating-rate loan market.

By the numbers:

• Default rates reached 7.2% in October 2023

• Over 50% of defaults this year came from distressed loan exchanges

• High-yield bond spreads are at their tightest since 2007

Between the lines: Several factors are amplifying the risk:

• A decade of uncapped growth in leveraged loans

• Many new borrowers have fewer assets to recover in default

• Looser loan documentation favors borrowers over lenders

• Companies are using distressed exchanges to delay rather than solve problems

The bottom line: While some experts believe Fed rate cuts will provide relief, others warn that current "extend and pretend" strategies through distressed exchanges may only postpone an inevitable reckoning.

Full Article Here: Defaults on leveraged loans soar to highest rate in 4 years