Bank of America has warned that about $1 trillion in private debt is heading into potential trouble.
Most of this debt was created by companies with a lower investment rating through high-yield loans or bonds.
About $400 billion of assets are considered to be in “pre-distress,” while $150 billion in assets are “in severe distress.”
According to Bank of America, there is a mountain of high-yield debt that could be at risk.
The bank estimated that about $1 trillion in high-yield debt has been accumulated by companies over the past five years, largely created by companies with a lower investment grade. About 25% consisted of below-investment-grade companies issuing risky, high-yield bonds, the bank said, while 35% consisted of large-scale syndicated loans taken out by below-investment-grade companies. The remaining 40% is classified as private debt.
Moreover, nearly half of this debt is facing some default risk, which could cause problems for the markets.
“$1 trillion of new leveraged credit faces the last five years’ day of reckoning,” Bank of America strategist Yuri Seliger said in a note Friday. “Nearly half of these funds are currently in well-functioning capital structures, while the other half is now going through various stages of stress,” he later added.
About $400 billion of debt, for example, is trading at rates over 6% — a range the bank classifies as “pre-distress,” since refinancing these debt assets can yield a coupon rate of 10% or higher. Another $150 billion in debt is considered “extremely troubled,” because refinancing is no longer an option.
Other experts warn Risks of escalating levels of public and private debt In the US, especially as the markets are out of an era Very low interest rates Orientation to a higher price system for longer.
US central bankers raised real interest rates in the economy by 525 basis points to tame hyperinflation, which dramatically increased the cost of borrowing. Meanwhile, corporate defaults are on the rise Total defaults in 2023 already exceed last year’s totalAccording to Moody’s Investors Service.
Up to $1 trillion in corporate debt could be at risk of default If the US enters a full recession, Bank of America previously predicted, although strategists no longer see a recession as likely this year.
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