As consumers and businesses adjust to higher interest rates and still-elevated inflation, a growing chorus of skepticism has emerged regarding the financial health of those companies that loaded up on debt when rates were near zero during the years prior to the pandemic. Indeed, bankruptcy filings for larger companies have increased sharply versus pre-pandemic run rates as debt-laden issuers have been forced to contend with labor shortages, higher input costs, soaring interest rates, and tighter credit conditions. Consequently, prices for bonds issued by and loans made to economically vulnerable companies have declined, with a growing amount of these obligations now trading below 80 cents on the dollar, a condition that bestows an unenviable label upon these instruments- Distressed Debt. Defined as bonds and loans trading below 80 cents on the dollar (and with a spread greater than 1,000 basis points for bonds), distressed debt has now topped $590 billion globally with more additions likely as slower economic growth, soaring debt servicing costs, ‘higher for longer’ interest rate stance by most central banks and tighter lending standards portend further strain for credit-sensitive issuers.
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