(Oct 7): The deeply distressed tail of the leveraged loan universe has grown to levels not seen since the beginning of the pandemic, with technology the single biggest sector under pressure.

That's according to strategists at JPMorgan Chase & Co., who on Tuesday wrote that the value of loans trading below 60 cents on the dollar, or deeply distressed levels, rose to $65 billion from $40 billion a year ago, to the highest since March 2020.

Distressed leveraged loans, or those trading at or below 80 cents on the dollar, are also on the rise, totaling $139.8 billion, a nearly 90% jump over the past 12 months and just $4 billion shy of a high in May 2020, strategists including Nelson Jantzen wrote in a report.

There are now about 141 leveraged loan issuers trading below 80 cents on the dollar, 35 more than a year earlier, with names including software providers CDK Global, QLIK Technologies Inc., and Quest Software among the biggest contributors.

The biggest concentration of distressed loans is in the technology sector at 39%, with a total of $54.4 billion, according to the report.

Software companies are facing an increasingly challenging refinancing environment as a wall of more than $100 billion of maturing debt is approaching. The sector came under pressure this year with concerns mounting that advances in artificial intelligence would disrupt businesses offering software services.

In the riskiest part of the leveraged loan market, returns on CCC loans, the lowest tier of junk, are down 1.97% year-to-date, compared with gains in every other junk-rated category, according to JPMorgan.

On the high-yield bond side of distress, spreads on debt rated CCC have jumped above 1,000 basis points, the highest since the 2023 regional banking crisis when investors dumped risky debt. Yields on CCC bonds have climbed to 15.58%, the highest since November 2022.

CCC spreads have been rising steadily in recent months as soaring global bond yields and the Federal Reserve's pivot to tighter policy added to pressure on highly levered borrowers by boosting debt service and refinancing costs just as a large chunk of bonds and loans comes due.

The JPMorgan strategists noted that the high-yield bond volume affected by defaults year-to-date is outpacing that of loans, "the first time this has occurred since 2020." The bank expects both high-yield bond and leveraged loan default rates to rise next year from a projected 2.25% in 2026 to 2.75% and 4.50% respectively.

Uploaded by Siow Chen Ming