- The scale of corporate restructuring could surpass financial-crisis highs on a swelling pile of junk-rated debt,BlackRock said Monday.
- Sub-investment grade debt outstanding ballooned to $US5.3 trillion since 2007. The coronavirus pandemic only exacerbated the growth, as the Federal Reserve’s bond purchases revived the credit market and companies rushed to raise cash.
- Yet the pandemic also curbed companies’ ability to repay debts as lockdowns slammed revenue streams, the strategists said.
- Those hoping to capitalise on a “wave of restructurings” should look to distressed-debt specialists and private credit markets, the team added.
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The scale of corporate restructuring could exceed 2008’s record high thanks to a leap in sub-investment grade debt, BlackRock said Monday.
Junk debt outstanding has more than doubled to $US5.3 trillion since 2007, and the virus’ economic fallout stands to lift that total even higher. Near-zero interest rates and the Federal Reserve’s move into bond-buying reinvigorated the corporate debt market early on in the pandemic. Once-stifled liquidity flowed freely through the debt market.
The surge in debt issuance leaves firms at a heightened risk of default. The average interest coverage ratio â€” a popular gauge of companies’ ability to pay off debts â€” for middle-market buyouts in 2019 hit its lowest level since just before the 2008 crisis.
“This left many vulnerable as their revenues come under pressure from COVID-related disruptions,” the team led by Mike Pyle wrote in a note.
Where the risk of restructuring can slam some portfolios, BlackRock identified areas of the market poised to benefit. Distressed-debt specialists should see new opportunities, particularly due to the ballooning share of private debt making up the $US5.3 trillion total.
Institutional investors are under-invested in private markets and underappreciating their ability to handle liquidity risk, the team of strategists added. Those focusing on smaller firms are positioned best. Large companies have borrowed more easily through the pandemic amid bolstered credit-market demand.
Yet smaller companies lacked such abundant liquidity sources. Many firms are already facing overhauls as the pandemic changes how Americans spend their time and money. This need can create “a wave of restructurings,” BlackRock said, adding there’s “room for private credit to cater to smaller and lower-credit quality issuers.”
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