Almost $1.2 trillion in speculative-rated corporate bonds – also known as “junk debt” – will come due over the next five years. This sets a record for the amount of risky loans to mature over such a short period, up 14 percent since last year.
Looking at growing signs of an economic slowdown ahead, Moody’s warns that the risk is rising for a growing number of these loans to go sour.
Making things worse, more companies are losing their formerly high bond ratings.
Moody’s now rates 36 percent of junk debt as B3 or lower, up a third from a year ago. A B3 rating is less risky junk debt than B- but still high-risk. B-rated loans now make up more than half the bonds maturing before 2025.
B-rated debt is still better than bonds rated Caa or lower, which now make up $61 billion of overall junk debt, up from $45 billion a year ago. Direct loans make up 63 percent of the debt coming due by 2025, the highest volume ever recorded.
About $240 billion of the debt is lodged in economic sectors that share a negative forecast: vehicles, chemicals, coal, forest products, manufacturing, railroads, steel, and telecoms. In 2019, petroleum-related companies had the worst default record and still hold about 8 percent of the maturing junk debt
“This greater percentage of lower-rated loans points to higher defaults in the next [economic] downturn,” Moody’s reports, and “a higher near-term risk for loans.”
Low interest rates have enabled lesser-rated companies to issue debt and then continue borrowing, in some cases to meet interest payments on previous loans.
TREND FORECAST: The debt bubble keeps building as central banks across the globe continue to flood the markets with cheap money. As economies slow and interest rates go lower, already deep-in-debt companies will sink deeper in debt as they borrow more to stay afloat.
Therefore, when the “Greatest Depression” begins to set in mid-2021, already troubled businesses will go out of business and bring down institutions and those that invested in them. Junk bonds will be worthless junk.
