(Corrects Mark Jenkins quote in 7th paragraph)

By Chibuike Oguh and Patturaja Murugaboopathy

Aug. 11 (Reuters) – The abundance of cheap corporate debt is pushing investors who typically buy debt from financially troubled U.S. companies to invest instead in financing companies that are shunned by banks and that don’t have no other way to borrow money.

Distressed debt investors grab a company’s debt in the hope that a potential bankruptcy would give them ownership of that company. The financial slowdown caused by the COVID-19 pandemic could have resulted in a tidal wave of such opportunities.

Instead, the US government and the Federal Reserve have flooded the market with liquidity, government assistance programs for the purchase of financial assets. This added to the cheap money that was already available thanks to the Fed’s near zero interest rates. Rajay Bagaria, chairman of Wasserstein Debt Opportunities, said troubled debt currently only accounts for 0.9% of the US high yield bond universe, adding that there were very few opportunities in the sector.

According to Fitch data, the 12-month default rate on US leveraged loans fell to 1.4% at the end of July, the lowest in 25 months.

Fitch expects the default rate to be 1.5% by the end of this year.

“The old troubled debt days where I would buy something like 60 or 70 cents a dollar, rearrange it, put more money in it and sell it two or three times, that doesn’t happen right now. “said Mark Jenkins, Global Credit Manager at Carlyle Group Inc.

As a result, troubled debt investors have resorted to bailout financing from companies in hard-hit sectors such as real estate, airlines and event management. They also provide loans to companies looking to consolidate their balance sheets in the face of growing consumer demand.

Struggling US debt funds have raised $ 12.4 billion in the first seven months of this year, down 60% from the $ 31.1 billion raised in the same period last year . Funds targeting direct loan investments have raised $ 28 billion, up from $ 27 billion raised a year ago, according to financial data provider Preqin.

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“The ‘distress’ of today has shifted into giving the upper hand to existing lenders,” said Chris Sheldon, head of leveraged credit at KKR & Co Inc, which has raised an “opportunity fund”. dislocation “of $ 2.8 billion at the height of the crisis last year. More and more private equity firms are replacing banks as lenders to businesses, especially those in the middle market with revenues of up to $ 500 million. For now, struggling investors are hoping the government’s economic support programs will run out soon, prompting companies to start looking for financing to pay off outstanding debt with short-term maturities.

“There are companies whose cash flow will not increase to the level that will allow them to refinance their debt. They really will not be able to hide,” said Victor Khosla, founder and chief investment officer at Strategic Value Partners, a group in difficulty. company with $ 15 billion in assets under management.

(Reporting by Patturaja Murugaboopathy in Bangalore and Chibuike Oguh in New York; editing by Diane Craft)