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Yield-hungry investors are seemingly refusing to see rising risks that threaten to spill over from U.S. bankruptcy courts, Bloomberg News reported. Federal Reserve interest-rate hikes beginning last year have sent the cost of money shooting higher, and companies in 2023 have been buckling at the second-fastest rate since the financial crisis. Despite that, the average risk premium for U.S. high-yield debt has remained muted — averaging 420 basis points this year — suggesting investors don’t find junk-rated companies all that risky. So far this year, 175 large companies have filed for bankruptcy in the U.S. as of Oct. 21 — a roughly 63% increase compared to the average for that period since the turn of the century, data compiled by Bloomberg shows. At the end of September, default rates for U.S. speculative-grade corporates had risen to 4.9%, from just over 1% at the start of last year, according to Moody’s Investors Service. The option-adjusted spread for high-yield debt, however, peaked at little more than 516 basis points over Treasuries in March and has since fallen to 420 basis points as of Wednesday, Bloomberg-compiled data shows. That’s less than the average spread over the last decade of 426 basis points, generally a period of low borrowing costs and low defaults. The spread was higher in 2015 — peaking at 691 basis points — when big corporate collapses were relatively rare compared to now, at just 105 big bankruptcies in total.

The boom in private credit, a fast-growing $1.5 trillion corner of Wall Street born during an era of ultralow interest rates, is starting to show cracks, WSJ Pro Bankruptcy reported. High borrowing costs, an economic slowdown and contractions in credit markets are testing private credit as never before. Many borrowers paying floating rates that fluctuate with benchmark interest rates are having a difficult time keeping up with rising debt payments, resulting in defaulting loans and, in some cases, bankruptcies. Some companies that turned to private debt to fund acquisitions and expansions during years of low interest rates are finding it harder to pay those installments. Small and less profitable borrowers were some of the most frequent users of private debt. Now, many of these companies are in negotiations with their private lenders and advisers. Private-credit funds haven’t weathered an interest rate environment like this before. The only recent whiff of trouble was at the start of the pandemic, when a slew of debt went unpaid, but that was quickly repaid as companies and consumers received massive government stimulus checks. The asset class largely thrived in an easy-money environment by collecting interest payments.

Wall Street lenders prevailed in a closely watched legal case that threatened to upend the syndicated-loan market, a key source of capital for private-equity firms, the Wall Street Journal reported. The U.S. Court of Appeals for the Second Circuit in New York yesterday ruled that a group of banks, including JPMorgan Chase and Citigroup, aren’t liable for the failure of a 2014 loan to drug-testing business Millennium Health. The verdict confirms a district court’s 2020 dismissal of the suit brought by Millennium bankruptcy trustee Marc Kirschner, who sought to increase recoveries for the company’s creditors. The banks chopped up the $1.8 billion loan and sold it to about 400 investors, who then lost money when Millennium filed for bankruptcy in 2015 and defaulted on the loan after settling a government investigation into illegal billing practices. The decision resolves—for now—a technical question with great significance for the $2.5 trillion U.S. syndicated-loan market. The circuit judges said they didn’t think the syndicated debt should be classified as a security, such as stocks and bonds. Earlier court rulings had come to the same conclusion “and plaintiff offers no compelling reason to revisit that decision now,” the appeals-court judges said.