CCC Cowboys

The BB High Yield Index began last week trading at just +227 basis points over Treasuries, suggesting excellent credit conditions, abundant liquidity and strong investor demand.

Meanwhile, the CCC High Yield Index began last week yielding 18.14%, signaling considerable financial distress among the weakest borrowers.

At no point in history has the CCC HY Index yielded more than 18% while the BB HY Index traded tighter than +400 basis points (see charts below).

CCC yields are hovering around 18%, while BB spreads tightened further to just +210 basis points.

How can the weakest credits perform so poorly when the economy and corporate earnings are so strong?

GDP expanded 3.4% in Q3, while S&P 500 corporate earnings have delivered exceptional growth, with another gangbuster earnings season underway (25% to 30% EPS growth).

The same divergence is evident in the broadly syndicated loan (BSL) market, where the amount of distressed loans has doubled thus far in 2026.

What explains this extraordinary disconnect?

Weaker borrowers are confronting maturity walls, liability management exercises (LMEs) that merely piled on additional debt without fixing underlying operational problems, over-levered businesses with elevated borrowing costs, changing consumer behavior and technological disruption, particularly across software sector.

This is severely impacting the weakest borrowers.

Consider the historical precedents. CCC yields exceeded 18% during the 2002 recession and telecom bust, the 2008 Global Financial Crisis, the 2016 energy collapse, the 2020 pandemic and the 2022 Fed tightening cycle.

In every instance, BB credits were also under considerable pressure, with spreads ranging from +400 to more than +1,000 basis points.
Not this time.

The credit market is increasingly separating winners from losers. Strong companies enjoy abundant access to capital at attractive rates, while weaker companies face prohibitively expensive financing, shrinking liquidity options, and deteriorating enterprise values.

Hedge funds loaded with CCC credits have become aggressive sellers, particularly those that unwisely employed leverage. The market is pricing over a 50% probabilty of default for CCC rated debt: S&P’s long-run data shows a cumulative default rate for CCC/C of 50% over 10 years.

Despite the YTD value destruction, there is plenty of opportunity in CCC companies that will not default. Significant returns can be earned as I believe that nearly 50% of CCCs will not default, offering the opportunity to purchase low double-digit coupons priced at considerable discounts to par.

The CCC Cowboys that invested in poorly performing businesses are hoping to weather this storm but there may be no way out. Selling your good CCCs does little to protect the capital invested in the remaining positions, but it does help deleverage, which the banks demand.

Storms pass, but deteriorating businesses with structurally unsound capital structures often do not.

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