Narrow Credit Spreads, Low Interest Rates, and Distressed Debt- By: NEIL SISKIND

Narrow Credit Spreads, Low Interest Rates, and Distressed Debt

Narrow credit spreads (in times of low bond yields) mean that financing operations with corporate bonds is inexpensive, and capital is pretty freely available for public companies. Low interest rates mean that there’s a low cost of capital and low debt service costs for public and private businesses.

In times of low rates, low yields, and narrow spreads, companies take on debt- sometimes, or often, too much debt- which can turn against them as interest rates rise, or as growth and earnings slow.

This puts companies, and their credit obligations, under pressure, and can push companies’ loans into default. When the number of non-performing loans (“NPLs”) rise, it creates distressed debt and distressed credit opportunities for investors.

Of course, a buyer of a distressed credit instrument has to understand the underlying business, industry, and sector of the subject company and have a proper business plan in order to improve performance and ensure a successful distressed credit investment.

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