The Distressed Debt Descent

The question now is how stomach-churning the turn in the credit cycle will be.

In just eight months, $183 billion of value evaporated from the U.S. high-yield bond market. At first, the losses crept up slowly on investors. Then the declines accelerated, with a nearly 5 percent plunge in the third quarter alone, forcing investors to face their first annual loss since the 2008 financial crisis.

How Far to Fall?

Since their peak this year, high-yield bonds have lost $183 billion.

Source: Bank of America Merrill Lynch

Why such carnage? Initially the declines were concentrated in the debt of commodities companies, which were struggling in the face of falling gas, iron ore and coal prices. But as the year went on, other industries also began to falter. Sprint, which has more than $30 billion of debt, was downgraded. Debt of retailers such as Claire's Stores and Bed Bath & Beyond also ran into trouble. Investors broadly stopped allocating money to the junk-debt market, and average prices on the notes dropped to the lowest since 2009.

Driving Down

Total high-yield return in 2015 by industry.

Source: Bank of America Merrill Lynch

Some funds have weathered the turmoil better than others. The worst performers had higher exposure to bonds with the lowest credit ratings. The Third Avenue Focused Credit fund, which was forced to liquidate and opted to gate in remaining investors to avoid a fire sale, had 82 percent of its assets in debt rated CCC or lower or that had no ratings at all. Some 45 percent of the Franklin High Income Fund's holdings carried B ratings, just one notch above the lowest tier of grades, according to data compiled by Bloomberg. Avenue Credit Strategies, a $2 billion fund, has performed worse than 98 percent of its peers this year, Bloomberg data show.


It's clear the credit cycle has turned. The question now is just how bad the pain will be.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Rani Molla in New York at
    Lisa Abramowicz in New York at

    To contact the editor responsible for this story:
    Daniel Niemi at

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