Subprime mortgages rise to highest rate in 4 years

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US companies are defaulting on non-performing loans at the fastest pace in four years, as they struggle to renew the wave of cheap loans that followed the Covid pandemic.

Shortfalls in the global credit market – most of which are in the US – rose 7.2 per cent in the 12 months to October, as higher interest rates hit heavily indebted businesses, according to the report. from Moody’s. That is the highest rate since the end of 2020.

The rise in defaulting companies contrasts with a sharp rise in debt in the bond market, underscoring how many risky American borrowers have drawn on the booming credit market. quickly.

Because leveraged loans – high-yielding bank loans sold to other investors – with floating interest rates, many of the companies that took out loans when interest rates were so low during the pandemic have struggled due to high borrowing costs in recent years. Many are now showing signs of pain even as the Federal Reserve pulls rates back down.

“There was a lot of supply in the low interest rate environment and higher pressures needed time to emerge,” said David Mechlin, head of credit portfolio at UBS Asset Management. “This (default mode) may continue until 2025.”

Penalty costs of borrowing, as well as light covenants, lead borrowers to look for other ways to extend this loan.

In the US, default rates on non-performing loans have risen to their highest level in a decade, according to Moody’s data. The expectation that rates will remain high for a long time – the Federal Reserve last week showed a slow pace of decline in the next year – it can keep upward pressure on default rates, say analysts.

Many of these limitations include so-called distressed loans. In such deals, the terms of the loan are changed and the maturity is extended as a way to help the borrower avoid bankruptcy, but the investors get less return.

Such transactions account for more than half of defaults this year, a historic high, according to Ruth Yang, head of independent market research at S&P Global Ratings. “When (the debt swap) hinders the borrower, it’s actually considered a liability,” he said.

“Several companies that would not have been able to use the public or private markets had to restructure their debt in 2024, which resulted in higher repayment rates than those of U.S. bonds. high yields,” Moody’s wrote in its report.

Portfolio managers are concerned that these high default rates are due to changes in the credit market in recent years.

“We’ve had a decade of passive growth in the bond market,” said Mike Scott, chief executive of high-yield fund Man Group. Many of the new lenders in sectors such as health care and software were relatively light on assets, meaning investors are likely to get back a small portion of their investment in the event of a default. mistake, he added.

“(There’s been) a bad combination of a lack of growth and a lack of recovery assets,” said Justin McGowan, a partner at commercial credit at Cheyne Capital.

Despite the rise of limitations, the spread of the high-yield market has a difficult history, at least since 2007 according to Ice BofA data, as an indication of investors’ desire for yield.

“Where the market is right now, prices are still good,” Scott said.

However, some fund managers think that the default interest rate will be shortened, as the Fed rates are already falling. The US central bank cut its benchmark rate this month for the third meeting in a row.

Brian Barnhurst, global head of credit research at PGIM, said the lower cost of borrowing should bring relief to companies that have been borrowing in credit or high-yield bond markets.

“We don’t see an improvement in defaults across the asset class,” he said. .”

But others worry that negative conversations give a sense of stress and put off problems until later. “(It’s) OK to kick the can down the road when that road goes down,” said Duncan Sankey, head of credit research at Cheyne, referring to when conditions were better for borrowers.

Some analysts blame the credit restrictions on loan documents in recent years for allowing an increase in distressed exchanges that hurt borrowers.

“You can’t put the genie back in the bottle. “The reduced quality (of the documents) has really changed the situation, in favor of the borrower,” said S&P’s Yang.