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Companies slash borrowing costs on $400bn of US junk loans

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Borrowers benefit from equivalent of two Fed rate cuts as demand for debt booms

US companies have been able to reprice almost $400bn of debt at lower interest rates this year due to booming investor appetite for junk loans, in an easing of financing conditions for corporate America. Even before the Federal Reserve cuts interest rates from a 23-year high, a number of borrowers in the US leveraged loan market have benefited from the equivalent of two quarter-point Fed cuts, according to strategists at Goldman Sachs.

Demand has outstripped supply, pushing the price of existing loans above their face value and therefore enabling companies to reprice them at lower borrowing costs. Thirty-nine per cent of the junk loan market was priced at or above par last Friday, according to the PitchBook LCD data, down from a peak of 65 per cent in mid-May but still substantially higher than just 2.4 per cent a year ago. The current situation is a “paradox”, said Goldman’s chief credit strategist Lotfi Karoui.

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