Strategists at JPMorgan Chase, including Nelson Jantzen, said Tuesday that $65 billion of loans priced under 60 cents on the dollar are now outstanding - the biggest tally since March 2020 - versus $40 billion a year ago.
Distress more broadly is mounting too. Loans marked at or under 80 cents have hit $139.8 billion, almost 90% higher than a year ago and only $4 billion under the May 2020 peak. About 141 leveraged loan issuers now sit below that 80-cent threshold, 35 more than a year prior.
Tech carries the biggest share of the stress, accounting for 39% of distressed leveraged loans, or $54.4 billion. Among the notable contributors: CDK Global, QLIK Technologies Inc., and Quest Software.
Software companies face a harder refinancing climate with more than $100 billion of maturities approaching. The sector has also come under pressure this year as worries grew that advances in artificial intelligence could disrupt businesses offering software services.
Distress in leveraged loans is an early warning for the credit cycle. Market Briefs covers credit risk free every morning.
In the weakest slice of the loan market, CCC loans are down 1.97% year to date, while every other junk-rated loan tier is positive. Over in high-yield bonds, CCC spreads have moved above 1,000 basis points, the widest since the 2023 regional banking crisis, and CCC yields now sit at 15.58%, their peak since November 2022.
JPMorgan attributes the strain to higher global bond yields and the Fed's shift toward tighter policy, which are pushing up interest and refinancing expenses just as a large batch of bonds and loans is maturing. The bank also notes that the volume of high-yield bonds affected by defaults this year is running ahead of loans, "the first time this has occurred since 2020." Looking ahead, it expects default rates to rise next year to 2.75% for high-yield bonds and 4.50% for leveraged loans, compared with a projected 2.25% in 2026.
A fatter tail of troubled loans, a tech-heavy distress mix, and pricier CCC funding all point to a choosier credit market. If you hold funds with leveraged loan or CCC exposure, this backdrop helps explain what might lag and what could catch a tailwind.
Pandemic-era distress levels are a level worth paying attention to. Get the free Market Briefs daily newsletter and watch it.
