Junk Bond Guru Sees Rising Distress Ahead as Banks Tighten Lending.

The strong US economy has left distressed debt investors starved of opportunity but that may be about to change, according to veteran high-yield analyst Marty Fridson.

The latest Federal Reserve survey of senior loan officers showed banks raising standards by the most in three years when they’re lending to medium-sized and larger companies. That’ll put the squeeze on borrowers already grappling with higher funding costs and global volatility from escalating trade wars.

Risky borrowers are having to refinance at higher interest rates as cheap Covid-era debt facilities start to expire. Despite the Federal Reserve starting to cut rates in September, borrowing benchmarks such as the 10-year Treasury yield have risen since then, leaving junk-rated firms more vulnerable to a downturn that would hurt their earnings and lead to job cuts, denting the wider economy.

There’s a correlation of about 0.7 between lending standards and the level of distress in credit markets, Fridson’s data going back to 1997 show. The distress ratio — the proportion of bonds trading at a spread of 1,000 basis points or higher — fell to 3.7% in January, well below the 12.7% historical average, and down from a recent peak of 10.4% in March 2023.

Source: FINANCE.YAHOO