The Zhitong Finance App learned that J.P. Morgan strategists wrote on Tuesday that the end of the deep plight of the leveraged loan market has risen to the highest level since the beginning of the pandemic, and technology is the single industry under the greatest pressure. Specifically, the size of loans with transaction prices below 60% of face value (that is, the level of deep distress) rose from 40 billion US dollars a year ago to 65 billion US dollars, the highest since March 2020.
Non-performing leveraged loans (that is, loans with a transaction price of 80% or less of face value) are also increasing, totaling US$139.8 billion, surging nearly 90% over the past 12 months, only US$4 billion below the May 2020 high. Strategists, including Nelson Jantzen, wrote in the report. Currently, about 141 leveraged loan issuers are trading 80% below face value, 35 more than a year ago. Among them, software providers CDK Global, QLIK Technologies Inc., and Quest Software are the biggest contributors.
According to the report, the technology sector has the highest concentration of non-performing loans, accounting for 39%, totaling US$54.4 billion. Software companies are facing an increasingly severe refinancing environment as the maturing debt wall of over $100 billion is approaching. The industry is under pressure this year, and the market is increasingly concerned that advances in artificial intelligence will disrupt companies that provide software services.
In the riskiest part of the leveraged loan market, CCC grade loans (the lowest level of junk bonds) have reported a return rate of -1.97% so far this year, while all other junk grade categories have recorded an increase. According to J.P. Morgan Chase data, in terms of high-yield bonds, interest spreads on CCC-grade bonds have jumped to more than 1,000 basis points, the highest since the regional banking crisis in 2023, when investors sold risky debts. The yield on CCC-grade bonds has climbed to 15.58%, the highest since November 2022.
In recent months, CCC-level spreads have continued to rise, as global bond yields soar and the Federal Reserve's shift to austerity policies, driving up debt repayment and refinancing costs for highly leveraged borrowers as large numbers of bonds and loans are about to expire.
J.P. Morgan strategists pointed out that the size of high-yield bonds affected by default so far this year has surpassed loans. “This is the first time since 2020.” The bank expects the default rates for high-yield bonds and leveraged loans to rise to 2.75% and 4.50%, respectively, from the 2.25% forecast in 2026 next year.