A prolonged rout in the riskiest parts of the global junk debt market is sending shockwaves through credit markets, driving some of its most active investors to steep losses as lenders lose faith in the world's most vulnerable corporate borrowers. Rising global interest rates have intensified fears about heavily indebted companies' ability to cope with AI disruption and high energy prices, while Europe has been hit further by concerns about France's fiscal health. Investors have dumped exposure to the market's most distressed companies, causing bond and loan prices to plummet for large high-yield borrowers in Europe and the US.
Yields on CCC-rated borrowers, the lowest rung of junk debt, have climbed to more than 21 per cent in Europe and 18 per cent in the US, up from about 16 and 15 per cent at the start of the year. "It's a complete bloodbath," said a portfolio manager at a large US hedge fund. "Everyone is scared of being in the next blow-up . . . being flat is the new up." Aggressive moves by cash-strapped owners to shift assets beyond creditors' reach have also caused some prices to fall suddenly, adding fuel to the sell-off.
The rout has hit some of the market's largest funds. Arini Capital Management, one of Europe's fastest-growing credit hedge funds, has seen its flagship fund fall to a 26 per cent loss this year. Arini owns large stakes in the debt of Aston Martin and Patrick Drahi's Altice International, both of which have plummeted after aggressive deals removed assets from creditors' reach. Multiple credit trading teams, known as "pods," across large multi-strategy hedge funds have also been forced to close.
The woes of these large funds have worsened price moves across the wider market. Simon Matthews, senior portfolio manager at Neuberger Berman, said the speed and severity of the sell-off had forced several special situation funds to unwind positions aggressively. Virgin Media's £22bn debt pile has also crashed this year, turning the company from a relatively stable credit into one of the most troubled groups in the market.
Source: Financial Times Companies · Summarized by HeadlinesBriefing