More than $1 trillion worth of junk debt is scheduled to mature over the next five years, a development that could provide heavily indebted businesses with serious challenges, according to a Moody's Investors Service report that was cited by The Wall Street Journal. While companies with low credit ratings can currently obtain funding at favorable rates, this situation could change if yields on junk debt surge. (For more, see also: Junk Bonds: Everything You Need to Know.)

Junk Debt Hits Record Levels

The total amount of junk debt set to mature in the next five years—$1.063 trillion—is the largest sum the credit ratings agency has ever recorded for such a period, according to the Journal. The vast majority of this amount, $933 billion worth of debt, is scheduled to mature after 2019, Bloomberg reported. In the near term, the junk debt market could potential encounter serious liquidity issues if there is not enough demand to cover the bonds that companies seek to issue, warned Moody's Investors Service analysts led by Tiina Siilaberg. 

Junk-rated businesses currently have favorable conditions for issuing debt, as the average yield on junk bonds fell to as little as 5.72% earlier this month, the lowest since September 2014, according to Bloomberg Barclays data reported on by the Journal. However, the average yield on this kind of debt surged to nearly 10% one year ago, as markets responded to concerns that the U.S. economy was moving toward another recession. 

Many Companies Vulnerable

If market conditions falter, certain industries could prove quite vulnerable, according to analysts who spoke with Investopedia. Market expert Vic Patel identified emerging markets and the energy sector, which makes up roughly 15% of the high-yield market, as facing particularly high risk. Should default rates surge in the energy sector, it could affect other asset classes, providing the broader junk debt market with headwinds, he said. 

Jamie Johnson, CEO of investment manager Fjp Investment Ltd., also singled out the energy sector as being at risk, noting that particular industry could experience some serious pain if oil prices remain low. He also identified technology, media and the telecoms markets as being vulnerable. 

Gene Tannuzzo, senior portfolio manager for Columbia Threadneedle Investments and manager of the Columbia Strategic Income Fund, took a different tack, pointing to the metals and mining, retail and automotive sectors as being particularly vulnerable. Should an economic downturn strike, the metals and mining industry could suffer another wave of defaults as companies with high production costs face potential insolvency, he told Investopedia. 

The retail sector has suffered steadily worse business conditions over the last several years, said Tannuzzo, and a recession could simply make the situation worse, preventing some retailers from accessing the funding they need to stay afloat. 

Is The Tide Turning Already?

On a broader level, the tide may already be turning for companies, Johnson told Investopedia. "Companies are beginning to address their maturities, and I am somewhat concerned as to how this is likely to play out, since we are dealing with unprecedented levels of junk debt," said Johnson. "Companies are already dealing with extremely high levels of debt, and the market is going to struggle when it comes to absorbing so much risky debt." (For more, see also: What role did junk bonds play in the financial crisis of 2007-08.) 

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