Amid Wave of Corporate Bankruptcies... Last Year's Junk Bond Recovery Rate at 33%

Lowest Level in 3 Years
Defaults Surge Among Companies with Weak Fundamentals Amid High Interest Rates

The recovery rate of junk bonds, which are non-investment grade corporate bonds, remained in the 30% range last year, marking the lowest level in three years. This is attributed to a surge in defaults among companies with weak fundamentals amid a high interest rate environment.

According to global investment bank (IB) JP Morgan on the 4th (local time), holders of defaulted junk bonds in the U.S. last year recovered an average of 33 cents per dollar. This is the lowest since 2020 (22 cents), when fundraising was difficult due to COVID-19 lockdowns. The 25-year average was 40 cents.

Junk bonds are high-risk bonds issued by companies with low credit ratings based on high yields. Investors willing to purchase bonds from low-credit companies require issuance at high interest rates. However, there is a significant risk of default on principal and interest payments.

As central banks worldwide maintain a high interest rate stance, many companies have gone bankrupt, leading to numerous investors failing to recover their bonds. According to Morgan Stanley, about 40% of U.S. corporate bankruptcy filings in 2023 were in a pre-default (debt default) state. Accordingly, the 12-month default rate is expected to peak in the first half of this year.

The recovery rate for leveraged loans recorded 38 cents per dollar, the lowest level since statistics began in 2000. Leveraged loans refer to loans secured by assets held by companies with low credit ratings.

Bloomberg reported that as investment institutions have successively canceled bailouts for distressed companies, the damage to bondholders has increased. Additionally, it analyzed that distressed companies have rapidly depleted funds due to various lawsuits related to defaults, resulting in reduced recovery amounts.

Wall Street experts pointed out that even this year, when the U.S. Federal Reserve (Fed) pivots to lowering interest rates, there remains a risk of repayment defaults. Brian Gelfand, Global Head of Credit and Credit Trading at asset management firm TCW Group, said, "It is still too early to say whether recovery rates will remain this low as the credit cycle ends," and warned, "Recovery rates could be even lower as riskier companies default first."

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