US Junk Loan Defaults Expand... Corporate Borrowing Costs Surge Amid Interest Rate Hikes

Junk Loan Defaults Reach $21 Billion This Year
Exceeding Total Amount for 2021-2022 Combined
"Entering Default Cycle"

Due to the Federal Reserve's (Fed) aggressive monetary tightening, loan defaults among low-credit companies are expanding. There are concerns that a credit crisis could occur as companies unable to withstand the interest rate hikes fail to repay their debts.

According to major foreign media on the 12th (local time), Goldman Sachs analyzed market information firm PitchBook LCD data and found that in the $1.4 trillion (1,780 trillion KRW) U.S. junk loan market, 18 defaults totaling $21 billion (about 27 trillion KRW) have occurred so far this year. This amount exceeds the total bad loans that occurred in 2021-2022.

Just last month alone, there were three loan defaults amounting to $7.8 billion (about 10 trillion KRW). This is the largest monthly amount since the outbreak of COVID-19 in 2020.

Junk loans refer to loans given to companies with low credit ratings classified as 'junk (speculative)' grade. These include leveraged loans, which are loans secured by assets from companies with high growth potential but low creditworthiness. After the Fed lowered interest rates to near zero following COVID-19, the size of leveraged loans nearly doubled from 2019 to 2021, reaching $615 billion (about 780 trillion KRW). Subsequently, as the Fed raised rates to 5-5.25% in just over a year, borrowing costs for companies with leveraged loans increased, and default risks soared.

Accordingly, the delinquency rate for junk loans is rising. According to PitchBook LCD, the delinquency rate for junk loans increased from 1.31% in April this year to 1.58% in May. Last month's delinquency rate is the highest since May 2021, two years ago. The default rate for junk loans also rose by 2 percentage points compared to a year ago, reaching 6% as of April.

Credit rating agency Standard & Poor's (S&P) forecasted that the delinquency rate for junk loan defaults could rise to 2.5% by March next year. This means that the number of companies vulnerable to stress and credit crises is increasing, and access to capital markets is becoming more difficult.

Goldman Sachs' Chief Credit Strategist Rotfi Karui said, "Repayment shocks are unfolding mainly among the most vulnerable companies in the loan market," adding, "Companies highly dependent on variable interest rates are experiencing very serious problems." Steve Caprio, Head of Credit Strategy for Europe and the U.S. at Deutsche Bank, stated, "We are preparing for entry into a default cycle."

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