America’s high-yield debt is on ever-shakier foundations

INVESTORS IN COMPANIES issuing high-yield or “junk” debt have had a relatively benign pandemic. Usually such highly leveraged borrowers are stung by economic hardship. During the global financial crisis over a decade ago around a seventh of such firms in America defaulted on their debt in one year. Yet according to Moody’s, a rating agency, less than 9% of them went into default in the year to August 2020, and the rate has continued to drop since. By the end of 2021, a booming recovery should put it back below its long-term average of 4.7%It may be too soon for high-yield investors to congratulate themselves, though. The low default rate masks a market that is much riskier than it was before covid-19 struck. Take high-yield bonds, the market for which is worth $1.7trn. Issuers have record levels of debt relative to their earnings, increasing their vulnerability to higher interest rates or a disappointing economic recovery. Cash-strapped borrowers are taking advantage of less restrictive loan contracts to rough up their creditors. And for the companies that do default, loans that used to be associated with high levels of protection and security are turning out to offer lenders anything but.