LONDON: The junkiest corporate debt is becoming increasingly hazardous for investors amid mounting signs that a default cycle is picking up steam.
The holding company of Thames Water Ltd this week failed to make payments that had come due on a £400mil bond (US$504mil).
It follows a plunge in the bond prices of Altice France last month after management told investors they would have to participate in “discounted transactions” to help the firm slash its debt.
As a result, investors are penalising CCC-rated debt even as wider bond spreads narrow to benchmarks.
In the last two weeks, the extra yield on the riskiest European debt reached the highest levels since Covid-19 shuttered entire industries and the euro region debt crisis was raging more than a decade ago.
In the United States, the widening is less dramatic, but nonetheless happening.
For years, asset managers bought the lowest band of bonds to boost returns because cheap money from central banks made it less likely that corporates would default.
After the fastest interest rate hikes in decades, some companies are beginning to struggle when they have to refinance their borrowings at a significantly more expensive level. The threat of haircuts for debt investors looms large as a result.
“There is going to be some pain ahead,” said Raphael Thuin, head of capital market strategies at Tikehau Capital. “Perceived wisdom is that it takes 18 to 24 months for rate hikes to take effect. We are in that period now.”
With central banks disappointing market hopes for a slew of interest rate cuts this year, the Bank of England warned last week that the risk of a widening in credit spreads has grown since the final quarter of last year. — Bloomberg
