"High Fed Rates Threaten Leveraged Loans with Wrecking Ball Impact"
Companies in the U.S. leveraged loan market could face distress if the Federal Reserve maintains high interest rates, according to Oaktree Capital Management. Elevated interest rates are making it challenging for companies to service their floating-rate debt, potentially leading to defaults. Moody's Investors Service estimates that about 62% of B-rated companies would struggle to pay interest on their debts if the Fed's policy rate remains unchanged. While leveraged loan defaults have been rising, total returns have remained positive. However, if the Fed keeps rates high for longer, the grace period for borrowers will narrow, exposing a significant portion of the sector to higher borrowing costs. Investors should prepare for potential disruptions in credit markets and consider buying opportunities.