Firms’ Distressed Debt Cycle Not Over, Pimco Says

 The end is not near for the distressed debt cycle, as many middle-market American companies will still have to be restructured because of debt taken on during the credit boom, Pimco said Wednesday. Reuters reported that while the default rate is falling on junk bonds, it is still rising for leveraged loans to middle-market companies, two Pimco portfolio managers, Stephen Moyer and Michael Watchorn, said on the company’s Web site.


Since November, the default rate on leveraged loans to middle-market companies has risen to about 12 percent from 10 percent, according to Pimco data, which is based on the dollar volume of bonds defaulting.
The dollar-weighted default rate on U.S. junk bonds has fallen to 9 percent from a peak of about 20 percent in November, according to Moody’s Investors Service.

“While many believe the distressed cycle is over, given the rally in the high-yield bond and leveraged loan markets, our research suggests the middle market remains particularly challenged,” the  report said.
Many companies counted on continued economic growth to help them sustain extraordinary debt burdens taken on during the credit boom, Pimco said.

A slower pace of economic growth following the recession will pose a challenge to these companies and their creditors, the fund managers said.

“Many have been bailed out by an accommodative monetary policy that has kept short-term interest rates at near-historical lows and thus reduced interest burdens during a period of declining operating cash flow,” the report said.

“However, these stretched balance sheets are inherently unsustainable in the New Normal,” Pimcosaid, referring to a period of slower growth it expects following the last recession.