Debt rated at the lowest triple C level sees limited gains amidst market rally
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According to Ice BofA data, triple C-rated US bonds, the lowest rung on the credit grade ladder, are yielding 13.6 percent on average, up from little more than 13 percent at the end of 2023. Rising yields indicate dropping prices.
As a result, the gap — the premium that low-rated borrowers must pay to issue debt over the US Treasury — has risen to 9.28 percentage points from 8.51 percent in late December.
These changes contrast with a recent boom in higher-quality credit markets, which has fueled a surge in debt issuance. Investment-grade borrowers sold bonds at a record pace in January, while high-yield or “junk” volumes hit a two-year high, as finance chiefs took advantage of a decrease in yields to borrow at lower rates.
Even after fresh US inflation statistics for January came in stronger than expected on Tuesday, raising worries about interest rates lasting higher for longer than expected, global credit spreads remained relatively stable. Bristol Myers Squibb, a high-grade pharmaceutical company, sold $13 billion in debt on Wednesday.
Investors and experts said the discrepancy between the highest- and lowest-quality bond spreads indicated ongoing concerns about extremely risky firms losing access to capital, pushing them further into difficulty – a situation that might lead to additional defaults.
“Our view is that for reasonably high-quality businesses, there will be interesting ways to access capital,” said Ed Testerman, partner at investment management company King Street financing. “[But] for the lowest quality companies, there will be fewer options at their disposal, which may drive more defaults.”
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According to Testerman, the differential between lower-rated and better-rated junk bonds “suggests that the market believes default rates and recovery rates will be much higher and lower, respectively, in the triple C market.”
Some pointed out that there has been little issuance of triple C-rated debt in recent years, leaving the index of low-grade bonds disproportionately concentrated around a small group of corporations.
“It’s not like triple C is a diversified index,” Jeremy Burton, US high-yield and leveraged loan manager at PineBridge Investments, said. “It’s heavily skewed towards stuff . . . that’s been downgraded over time from single B.”
Please utilize the sharing options available via the share button at the top or side of articles. Copying articles to distribute with others violates FT.com’s terms and conditions and copyright policy. To purchase additional rights, please email licensing@ft.com. Subscribers may share up to 10 or 20 articles per month using the gift article service. For more information, visit https://www.ft.com/tour.Ice BofA’s index includes Dish, the TV business that just merged with EchoStar. EchoStar then offered a series of “distressed exchanges” – transactions in which investors are invited to exchange part of their debt holdings for assets of reduced value.
Other bonds with triple C ratings were issued by McAfee, Cloud Software Group, and LifePoint Health.
According to a report released on Thursday by S&P Global Ratings, triple C borrowers will face “weak cash flow and elevated interest expenses this year,” while defaults in 2024 will primarily come from consumer-facing sectors such as consumer products, media and entertainment, and the still highly leveraged healthcare sector.
As of February 15, technology, media, and telecommunications businesses accounted for about a third of the $174 billion triple C index, with healthcare accounting for more than a tenth.
According to Burton of PineBridge, “the market feels really good about overall high-yield credit spread risk right now”. On the other hand, traders are “very wary of the bottom 5 or 7 per cent of the market, where there is . . . material default risk over the next two years” .
“The market is being really punitive on that stuff.”
