For a decade, US high-risk borrowers insisted no one should worry about leverage, just pay attention to coverage. Low interest rates implied that for any given dollar of debt, periodic servicing costs would be manageable, allowing for incrementally higher leverage.
Rapid and aggressive monetary tightening has flipped that relationship on its head.
Many companies gorged on leveraged loans. These often required floating rate exposure to Libor or SOFR benchmarks. Base rates have accelerated from almost 0 per cent to 5 per cent in a year. The businesses are now grappling with liquidity challenges.
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