The Fate of U.S. Corporate Junk Debt
Years of relatively sanguine conditions in the leveraged finance market created an enormous supply of new paper and underwriting opportunities for investment banks. 66% of outstanding junk-rated U.S. corporate debt is set to mature in the next five years. Refinancing will be the obvious course of action if market conditions hold. Many firms have already done so: IB fees from refinancing junk-debt this year are already on pace to be the highest on record. While the original lenders will have the upper hand in winning this business, many of them have lightened their footprint in the U.S. market. North American Banks have emerged in the last 5 years in place of the retreating European Universal banks. If rising interest rates and/or geopolitical risk upend the leveraged finance market, we may see a different scenario emerge. Highly leveraged issuers unable to find funding in more challenging conditions may turn to restructuring. Specialists like Houlihan Lokey, Lazard, Moelis & PJT dominate the restructuring market, which has grown 1.5x in the last 12 months.