A squeeze on junk bonds is likely to put some companies out of business in coming years. Odds are they won’t be able to refinance maturing speculative grade debt.
Right now, it’s not a particular worry. Call this the calm before the storm. Investors are buying issues of junk bonds, and the share of companies defaulting on their debt payments will be only around 4% by the end of this year. That’s well below the recent peak of 14%. Today’s low interest rates and moderate economic growth are promoting stability in the credit markets.
It helps, too, that total junk bond debt maturing this year is a manageable amount -- around $50 billion. But the amount will rise sharply in coming years, to $400 billion in 2014 alone. In contrast, total investment grade debt maturing will peak at roughly $200 billion in 2013 -- and decline to about $150 billion in 2014.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
About 71% of debt maturing in 2014 was sold in leveraged buyouts in 2007. That was before panic swept through the financial markets and before the recession began. Bank lending was strong, and a secondary market for securitized debt was thriving. The situation today is nearly the polar opposite: Banks are reluctant to lend, demanding much tougher terms. They’re building up capital. And the market for securitized debt is stagnant.
With economic growth likely to remain modest, many of the companies that borrowed in the easy credit days won’t have enough cash to refinance. John Bilardello, head of global corporate ratings at Standard & Poor’s, says: “The message for investors is don’t be complacent. Be aware.” The greatest risks, adds Bilardello, reside in five sectors: media and entertainment (including hotels and casinos), telecommunications, health care, technology and consumer oriented firms, such as retailers and restaurants.
The cost of borrowing for low rated firms is already on the rise as investors sense the potential for trouble ahead. The spread between junk bonds and safe 10-year Treasuries is widening. It surged to seven percentage points in early July, up from a two-year low of 5.5 percentage points just a few months earlier, in April, when most economists and investors expected that the economy would be growing more vigorously by now.
What’s more, year after year of large federal budget deficits will add to the pressure on companies seeking to refinance. As Uncle Sam competes for investment dollars, interest rates will climb.
-
Dow Hits New Intraday High on Fed Day: Stock Market TodayNot even the most important stock in the world could keep the oldest equity index down on a significant day for markets.
-
Savings Goal CalculatorTools Want to know how much you need to save each month to reach your financial goals? Our calculator helps you build a realistic savings plan.
-
Trump's Economic InterventionThe Kiplinger Letter What to Make of Washington's Increasingly Hands-On Approach to Big Business
-
AI Start-ups Are Rolling in CashThe Kiplinger Letter Investors are plowing record sums of money into artificial intelligence start-ups. Even as sales grow swiftly, losses are piling up for AI firms.
-
What is AI Worth to the Economy?The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?
-
Kiplinger Special Report: Business Costs for 2026Economic Forecasts Fresh forecasts for 2026, to help you plan ahead and prepare a budget on a range of business costs, from Kiplinger's Letters team.
-
Trump-Era Regulations Will Broaden Access to CryptoThe Kiplinger Letter The president wants to make the U.S. the leader in digital assets.
-
Breaking China's Stranglehold on Rare Earth ElementsThe Letter China is using its near-monopoly on critical minerals to win trade concessions. Can the U.S. find alternate supplies?
-
America's Surprising Strengths in Manufacturing and ExportsThe Kiplinger Letter Despite common perceptions that the U.S. doesn't build things anymore, American factories are still hard at work. A special report from The Kiplinger Letter.
-
The Economic Impact of the US-China Trade War
The Letter The US-China trade war will impact US consumers and business. The decoupling process could be messy.
