The abundance of cheap corporate debt is pushing investors who typically buy the debt of U.S. companies in financial distress to invest instead in providing financing to companies that are shunned by banks and don’t have any other way to borrow money, Reuters reported. Distressed-debt investors snap up the debt of a company with the expectation that a potential bankruptcy would give them ownership of that company. The financial downturn brought about by the COVID-19 pandemic could have resulted in a tidal wave of such opportunities. Instead, the U.S. government and Federal Reserve flooded the market with liquidity, from government-assistance programs to buying financial assets. This added to cheap money that was already available thanks to the Fed’s near-zero interest rates. Rajay Bagaria, president at Wasserstein Debt Opportunities, said distressed debt accounts for only 0.9% of the U.S. high-yield bond universe currently, adding that there were very few opportunities in the sector. According to Fitch data, the trailing 12-month default rate of U.S.-leveraged loans dropped to 1.4% at the end of July, the lowest in 25 months. Fitch expects the default rate to be at 1.5% at the end of this year.
