Many companies borrowed at ultralow rates during the pandemic through so-called leveraged loans. Often used to fund private-equity buyouts — or by companies with low credit ratings — this debt has payments that adjust with the short-term rates recently lifted by the Federal Reserve. Now, interest costs in the $1.7 trillion market are biting and Fed officials are forecasting that they will stay high for some time, the Wall Street Journal reported. Nearly $270 billion of leveraged loans carry weak credit profiles and are potentially at risk of default, according to ratings firm Fitch. Conditions have deteriorated as the Fed has raised rates, beginning to show signs of stress not seen since the onset of the COVID-19 pandemic. Excluding a 2020 spike, the default rate for the past 12 months is the highest since 2014. The strains come at a time when leveraged-loan funds have put up outsize performances. Investors had feared rising rates would hurt risky borrowers, particularly if they spark a recession. Instead, a strong economy has helped issuers withstand rising interest costs while bonds with low fixed rates have tumbled, amplifying the advantage of floating-rate debt. (Subscription required.)
