Are Cracks Forming in Corporate Credit Markets?

Lawrence Gillum (00:00):

The U.S. corporate credit markets have on the surface remained resilient through much of 2025. Investment grade spreads are near secular tights. Yields remain attractive, and investor demand has been robust. Yet beneath the surface, signs of stress are beginning to emerge. So in this addition of the LPL Street View video, we examine the recent rise in corporate bankruptcies. A trend that suggests cracks may be forming in certain parts of the corporate credit markets throughout the year, investment grade corporate bonds have benefited from strong technicals while spreads or the additional compensation required to own riskier debt remain at or near secular tights. Total yields are still elevated, which has supported steady inflows into taxable bond funds and ETFs. Both foreign and institutional demand have also remained strong this year, which has helped keep spreads range bound. However, this strength masks growing fragility in the broader credit landscape, particularly amongst lower rated corporate borrowers.

Lawrence Gillum (00:57):

A series of recent collapses, including those of Sacks, new Fortress Energy, Tricolor Holdings, and First Brands Group to name a few have inflicted losses of 60% or more on investors prompting worries that these kind of events may not be one offs. While some of these losses were slow moving, it's clear that volatility has returned to the corporate credit markets. Moreover, according to cornerstone research, the first half of 2025 saw 17 mega bankruptcies defined as filings by companies with over 1 billion in assets, the highest number for any six month period since the COVID-19 pandemic. Total large company filings assets over a hundred million reached 117, marking 81% increase over the long-term average through October 4th. That number has continued to grow with 142 large bankruptcy filings this year, compared with 133 during the same period last year. Years of high interest rates, which are good for investors but not so great for borrowers are clearly weighing on some companies.

Lawrence Gillum (01:56):

Now, the concern isn't that we're on the verge of a crisis, at least not as long as the economy continues to grow as we expect, it's more that investors aren't getting paid to take on these types of risks with corporate bond yields that are barely above treasury yields. Admittedly, over the last five years, higher borrowing costs have imposed greater discipline on lower quality issuers leading to a clear downward shift in the market's overall risk profile. But there will always be idiosyncratic risk within these markets and market pricing should reflect those concerns. And while recent widening in the high yield market has taken place, in our view, spreads are still tight, given current conditions and rising idiosyncratic risks. While the overall credit market remains stable, the divergence between investment grade and high yield sectors is becoming increasingly pronounced. The recent uptick in defaults and distressed exchanges among speculative grade issuers underscores the vulnerability of companies with weaker balance sheets and limited access to capital.

Lawrence Gillum (02:53):

This bifurcation is not new, but it is becoming more acute in the current environment of elevated interest rates and title lending standards. From a portfolio management perspective, this environment calls for increased selectivity and a renewed focus on credit fundamentals. Investors may need to reassess their exposure to sectors with elevated leverage. Active management and rigorous credit analysis will be essential to navigate the evolving landscape and avoid potential pitfalls. Bottom line, while the corporate credit markets are not in crisis, the growing number of bankruptcies and signs of stress among lower eight rated issuers suggest that cracks are indeed forming. Investors should remain vigilant, balancing the appeal of attractive yields with a clear-eyed view of the underlying risks. As always, diversification, discipline and a long-term perspective will be key to weathering any turbulence that may lie ahead. That's it for now, but for more information on global capital markets, make sure you're following us on our social media accounts. Take care.