US 'CCC Rating' Funds Flowing Even to Near-Bankruptcy Companies

Junk Bond Boom on Stimulus Hopes... Bankruptcy and Losses Inevitable if Interest Rates Rise

[Asia Economy Reporter Byunghee Park] With abundant liquidity fueled by the ultra-low interest rate policy of the U.S. central bank, the Federal Reserve (Fed), combined with expectations for a large-scale stimulus package from U.S. President Joe Biden, money is flowing even into companies on the brink of bankruptcy. There are concerns that the proliferation of distressed companies could act as a time bomb for the future economy.

According to financial market information provider LCD, corporate bonds issued by U.S. companies with credit ratings of CCC or below have exceeded $13 billion so far this year. LCD explained that if the current trend continues, the issuance volume of corporate bonds by these speculative-grade companies will more than double the previous record this year. CCC is the credit rating assigned to the riskiest companies, excluding those already in bankruptcy.

Another financial market information provider, Refinitiv, reported that the proportion of corporate bonds rated CCC or below has exceeded 15% of the total corporate bond market this year, marking the highest level since 2007. Refinitiv noted that 2007 was just before the global financial crisis, and since bond issuance conditions tightened due to the crisis, this is the largest issuance of junk-rated corporate bonds.

Due to the Fed’s ultra-low interest rate policy, there is an abundance of money in the market. On the other hand, overall interest rates in the financial market remain low because of the ultra-low rates. As a result, money is flowing into the junk bond market, which offers the potential for high returns. The ICE BofA U.S. High Yield Bond Index, which reflects the yield of junk-rated corporate bonds, recorded a yield of 3.97% as of the 12th, nearly four times higher than the 1.2% yield on the U.S. 10-year Treasury bond.

The rise of funds employing leveraged buy-out (LBO) strategies is also a reason for the boom in the junk-rated corporate bond market. LBO funds borrow money at low interest rates to acquire distressed companies, then increase corporate value through restructuring and sell them for profit. The demand from these LBO funds is driving the supply of junk-rated corporate bonds.

Market insiders express concerns that the boom in junk bonds is producing more distressed companies, and that when U.S. benchmark interest rates rise in the future, corporate bankruptcies and investment losses could surge. Jerry Kozil, head of bond trading at TCW, said, "The caution that may have existed in the past is hard to find now."

This content was produced with the assistance of AI translation services.