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There is about $1 trillion in private debt headed for potential trouble, Bank of America warned.
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Most of that debt was created by companies rated below investment grade through high-yield loans or bonds.
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About $400 billion of assets are considered to be in “pre-distress,” while $150 billion of assets are “deeply distressed.”
According to the Bank of America, there is a mountain of high-interest debt that could be at risk.
The bank estimated that companies have accrued about $1 trillion in high-yield debt over the past five years, largely created by companies rated below investment grade. About 25% are sub-investment grade companies issuing high-risk high-yield bonds, while 35% are broadly syndicated loans issued by sub-investment grade companies, the bank said. The remaining 40% was classified as private debt.
In addition, about half of that debt is at some risk of default, which could spell trouble for the markets.
“$1 trillion in new leveraged credit from the past five years faces reckoning day,” Bank of America strategist Yuri Seliger said in a note Friday. “About half of this money is in currently well-performing capital structures, while the other half is now in various stages of stress,” he later added.
For example, about $400 billion in debt trades at rates above 6% — a range the bank classifies as “pre-distress” since refinancing those debt assets could yield coupon rates of 10% or higher. Another $150 billion in debt is considered “deeply distressed” as refinancing is no longer an option.
Other experts have warned of the dangers of rising private and public debt in the US, especially as markets leave an era of ultra-low interest rates and move into a new, longer-lasting interest rate regime.
US central bankers have raised real interest rates in the economy by 525 basis points to curb runaway inflation, which has significantly increased the cost of borrowing. Meanwhile, corporate bankruptcies are on the rise, with the total number of bankruptcies in 2023 already surpassing last year’s total, according to Moody’s Investors Service.
Up to $1 trillion in corporate debt could default if the US slides into a full-blown recession, Bank of America previously predicted, though strategists say a recession is no longer likely this year.
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