Nearly $650 Billion of distressed debt

(Bloomberg), Multiple stress points are emerging in credit market after years of excess. These include banks stuck with piles buyout debt, a UK pension crisis, and real-estate problems in China and South Korea.

Bloomberg: Most Read

Cheap money may soon be a thing of the future, with cheap money being a thing of the distant past. The US’s distressed debt rose more than 300% in just 12 months. High-yield issuance in Europe is more difficult and some measures have set new records for leverage ratios.

These strains are mostly due to aggressive rate hikes by the Federal Reserve and other central banks around the globe, which have drastically changed the lending landscape and pushed economies towards recessions. This scenario is still not priced in by markets.

Bloomberg data shows that $650 billion worth of bonds and loans is in distress worldwide. It’s all adding up to the biggest test of the robustness of corporate credit since the financial crisis and may be the spark for a wave of defaults.

“Many are likely to be slightly more complacent than they should be,” Will Nicoll is the chief investment officer at M&G for Private & Alternative Assets. “It is very difficult to see how the default cycle will not run its course, given the level of interest rates.”

Banks say their wider credit models are proving robust so far, but they’ve begun setting aside more money for missed payments, data compiled by Bloomberg show.

The 3rd quarter saw a 75% increase in loan-loss provisions at systematically significant banks compared to a year ago, which is a clear indicator that they are preparing for defaults and payment problems.

The consensus of economists is for a mild slump in the coming year. However, a deep recession could lead to credit problems as the global financial system is in crisis. “vastly over-leveraged,” according to Paul Singer’s

*As an Amazon Associate I earn from qualifying purchases