Bank of America has issued a warning about a mountain of high-yield debt that could potentially be at risk. The bank estimates that companies have accumulated approximately $1 trillion of high-yield debt over the past five years, largely driven by below-investment grade corporations.
According to Bank of America’s analysis, around 25% of this debt consists of below-investment grade firms issuing risky high-yield bonds. Additionally, 35% is comprised of broadly syndicated loans taken out by below-investment grade companies, while the remaining 40% is classified as private debt. This buildup of high-yield debt poses a significant concern for the market.
Bank of America strategist Yuri Seliger stated in a note on Friday, “$1 trillion in new leveraged credit over the last five years faces its day of reckoning.” Seliger further explained that approximately half of this borrowed money is currently housed in well-performing capital structures, while the other half is now in various stages of stress.
To dive deeper into the potential risks, it is worth highlighting specific figures. Around $400 billion of the debt is currently trading at rates over 6%, which Bank of America categorizes as “pre-distress.” Refinancing these assets could lead to a coupon rate of 10% or higher. Additionally, roughly $150 billion of the debt is considered to be “deeply distressed,” as refinancing is no longer a viable option.
It’s not just Bank of America raising concerns about mounting debt levels in the United States. Experts have been voicing worries about both private and public debt as the country moves away from a period of low-interest rates towards a regime of higher rates. The US has seen an increase in real interest rates, with a rise of 525 basis points to combat inflation, subsequently leading to elevated borrowing costs for corporations. This, coupled with a surge in corporate defaults – surpassing last year’s total, according to Moody’s Investors Service – paints a worrisome picture.
Bank of America had previously predicted that up to $1 trillion of corporate debt could be at risk of default if the US were to enter a full-blown recession. However, strategists currently do not see a recession as likely to occur this year.
In conclusion, the accumulating high-yield debt of around $1 trillion poses a potential risk for the market. With about half of this debt at risk of defaulting, experts are closely monitoring the situation. As interest rates rise and concerns over mounting debt levels persist, it remains to be seen how these factors will shape the financial landscape in the near future.
