JPMorgan finds leveraged loans' distress nearing 2020 peak

Leveraged loans trading below 60 cents per dollar total $65 billion, up from $40 billion a year earlier, JPMorgan strategists report.

That puts the most distressed portion of the market at its largest since March 2020, according to JPMorgan Chase & Co. The bank identifies technology as the largest source of troubled loans, concentrating the refinancing risks in a sector already facing pressure.

Technology accounts for $54.4 billion

Technology represents 39% of distressed loan balances, equivalent to $54.4 billion, according to the bank’s report. Strategists including Nelson Jantzen identify software businesses CDK Global, QLIK Technologies Inc., and Quest Software among the largest contributors to the broader distressed total.

The technology figures cover loans priced at 80 cents per dollar or less, a broader measure than the below-60-cent category. Across sectors, that pool totals $139.8 billion, almost 90% above its year-earlier level and only $4 billion below the May 2020 high, the strategists wrote.

The deterioration also extends across more borrowers rather than appearing solely in the balances of a few companies. JPMorgan counts approximately 141 issuers with loans below the 80-cent threshold, an increase of 35 over the preceding year.

CCC loans separate from stronger credits

Investment performance shows a divide within speculative-grade lending. Loans rated CCC, the weakest credit tier identified in the report, have returned negative 1.97% since the start of the year, while every other junk-rated loan category has delivered gains, according to JPMorgan.

Those figures distinguish pressure on the weakest borrowers from a decline across all lower-rated loans. They also separate two measures that should not be conflated: the amount of debt trading at distressed prices and the returns investors have received from holding a particular rating category.

For CDK Global, QLIK Technologies Inc., and Quest Software, inclusion among the largest contributors identifies exposure to distressed trading conditions, not a reported default. The material provides neither company-level loan prices nor individual maturity schedules, leaving the timing and scale of each business’s financing requirements unresolved.

JPMorgan projects higher default rates

The bank’s strategists say the volume of high-yield bonds affected by defaults this year exceeds the corresponding loan volume, a pattern last recorded in 2020. That comparison concerns debt amounts, rather than establishing that the bond default rate is higher.

JPMorgan projects a 2.25% default rate for both high-yield bonds and leveraged loans in 2026. For the following year, it forecasts rates of 2.75% for bonds and 4.50% for loans, increases of 50 and 225 basis points, respectively.

If distressed pricing persists when affected borrowers seek replacement financing, more expensive borrowing could constrain their spending and hiring. For the named software companies, that scenario would depend on their financing needs; across technology, a simultaneous retrenchment could transmit credit pressure into weaker investment and economic demand.

If financing conditions instead improve before borrowers need new funds, distressed prices need not translate into the defaults JPMorgan projects. The unresolved issue is whether the growing pool of troubled loans leads to missed payments, particularly in technology, or whether borrowers secure financing before that pressure becomes binding.