JPMorgan: U.S. deep non-performing loans rise to pandemic-era highs, tech industry hardest hit

According to Jinse Finance APP, JPMorgan strategists wrote on Tuesday that the tail end of the deeply distressed leveraged loan market has risen to its highest level since the early days of the pandemic, with technology being the single most pressured industry. Specifically, the scale of loans trading at less than 60% of face value (i.e., deeply distressed level) has increased from $4 billion a year ago to $6.5 billion, the highest since March 2020.

Non-performing leveraged loans (i.e., loans trading at or below 80% of face value) are also increasing, reaching a total of $139.8 billion, surging nearly 90% in the past 12 months, only $4 billion below the peak in May 2020. Strategists including Nelson Jantzen wrote in the report. Currently, about 141 leveraged loan issuers are trading at less than 80% of face value, 35 more than a year ago, with software providers CDK Global, QLIK Technologies Inc., and Quest Software being the largest contributors.

The report indicates that troubled loans are most concentrated in the technology sector, accounting for 39%, totaling $54.4 billion. Software companies are facing an increasingly severe refinancing environment, as more than $100 billion in maturing debt walls is approaching. The industry is under pressure this year, with rising market concerns that advances in artificial intelligence could disrupt companies providing software services.

In the riskiest part of the leveraged loan market, CCC-rated loans (the lowest tier of junk debt) have returned -1.97% so far this year, while all other junk-rated categories have posted gains. JPMorgan data shows that in high-yield bonds, the spread on CCC-rated bonds has jumped to over 1,000 basis points, the highest since the 2023 regional banking crisis, when investors sold off risky debt. CCC-rated bond yields have climbed to 15.58%, the highest since November 2022.

In recent months, CCC-rated spreads have continued to rise due to surging global bond yields and the Federal Reserve's shift to tighter policy, driving up debt servicing and refinancing costs for highly-leveraged borrowers as large amounts of bonds and loans approach maturity.

JPMorgan strategists pointed out that the scale of high-yield bonds impacted by defaults has surpassed loans so far this year, "the first occurrence since 2020." The bank expects default rates for high-yield bonds and leveraged loans to rise to 2.75% and 4.50% respectively next year, up from the 2.25% and 4.50% forecast for 2026.