All articles tagged with #corporate debt
Annuities, an insurance product used for retirement funding, reached record sales of $385 billion last year, driving demand for corporate debt and commercial mortgage bonds. The products have become more attractive due to rising interest rates, leading to higher potential annual payouts.
Ford Motor Co.'s credit rating upgrade to investment grade has led to $46.8 billion of debt being removed from junk bond indexes, resulting in the largest monthly decline in the global benchmark of junk debt in 18 years. This upgrade signifies a shift in corporate priorities as companies strengthen their finances amid a potential recession. The decrease in fallen-angel bonds and the expectation of more rising-star upgrades indicate improving credit fundamentals, despite concerns about the economy. Analysts predict that $70 billion to $90 billion of debt will be upgraded to investment grade in 2024, while only $20 billion to $40 billion is expected to be downgraded to high-yield next year.
Fading optimism on interest rates signals trouble for the $425 billion debt wall facing corporate America. The strong US jobs report increases the likelihood of another Federal Reserve rate increase this year, which is negative for companies that have been increasing their debt levels as yields have surged. Companies face higher borrowing costs, which could cut into profits and increase default risk. The higher yields have already shut down new junk bond sales, and the average yield on the Bloomberg Global High Yield index has reached its highest level since November last year. The corporate private credit market is also expected to see more defaults.
As interest rates rise, companies with high levels of debt on their balance sheets may face increasing pressure. Refinancing corporate debt will start impacting profits in 2024, with $903 billion in U.S. corporate debt coming due that year. Higher interest rates will increase borrowing costs, eating into future earnings and cash flow. CNBC has identified stocks that meet certain criteria, including a high debt-to-equity ratio, falling earnings, and trading near a 52-week low. Companies such as General Motors and Whirlpool are among those that may be vulnerable.
Fidelity International's Salman Ahmed warns that a recession is likely in 2024 as companies face the challenge of refinancing debt at higher interest rates. The effects of the Federal Reserve's monetary policy tightening and a wave of corporate debt refinancing over the next six months are expected to materialize next year, potentially pushing the economy into a downturn. Higher debt-servicing costs reduce companies' ability to invest and pay workers, and the current stock valuations and credit spreads indicate that the impending downturn is not yet fully priced into markets. Fidelity International has adjusted its investment strategy, overweighting cash and investment-grade credit while remaining underweight on stocks. Despite economists on Wall Street revising their recession forecasts, Ahmed maintains that a downturn is still likely, supported by a recent study from Fed officials indicating that the full effects of interest rate hikes take about a year to be felt by companies.
The world is facing economic uncertainty as credit markets show signs of strain. Companies that loaded up on cheap debt during a period of low borrowing costs are now facing the challenge of renewing their financing at higher interest rates. This could lead to an increase in bankruptcies and defaults, especially if the Federal Reserve continues to keep borrowing costs high. Already, corporate defaults are running at their fastest pace in over a decade, and there is a significant amount of debt in a precarious position. The longer interest rates remain elevated, the deeper the stresses are likely to become, potentially causing job losses and curtailed growth. The fear of missing out and the resilient economy have lured investors into debt markets, but the longer inflation remains elevated, the more companies will be forced to shoulder higher borrowing costs.
Rising corporate debt defaults and downgrades to junk credit ratings are starting to impact companies, with examples including retailer Casino, Britain's Thames Water, and Swedish landlord SBB. Despite this, the cost of insuring exposure to European junk-rated corporates remains low, indicating investor complacency. S&P Global expects default rates for U.S. and European sub-investment grade companies to rise in the coming months. Analysts warn that corporate bond yields should command a higher premium, as current spreads do not reflect the risks. Refinancing will be costly for companies with looming debt maturities, and some firms are already seeking debt restructuring to avoid insolvency.
Leveraged loan defaults have reached $24.5 billion, putting the sector on track for the third-worst year in history, according to Goldman Sachs. The rise in defaults is due to the Federal Reserve's interest rate hikes, which have hit borrowers with floating-rate debt particularly hard. Leveraged loans are high-risk financing for companies with substantial debt and poor credit histories, and have given rise to leveraged corporate buyouts. The sector has also produced collateralized loan obligations and exchange-traded funds.
Companies with investment-grade credit ratings have not sold new bonds since the collapse of Silicon Valley Bank two weeks ago, and the market for new junk-bond sales has largely stalled this month. No companies have gone public on the New York Stock Exchange in more than two weeks. The capital markets have been on ice due to treasury market volatility.