Credit Pressure Widens for Weaker Borrowers

Fresh credit reports published Monday show a widening divide between stronger borrowers and those already struggling to refinance. For the Fly High universe, that distinction matters more than a broad claim that credit is either healthy or broken: a lender can keep collecting attractive interest while its weakest borrowers become less able to pay.

BNY’s October 26 analysis says the extra yield demanded on below-investment-grade corporate bonds, known as the credit spread, has risen by more than 0.60 percentage points since September 1, compared with just 0.07 points for investment-grade bonds. Last Friday, the gap between those two markets reached its widest since May 2025. Pressure is concentrated in the lowest-rated borrowers, while stronger speculative-grade credit has remained comparatively steadier.

There is evidence of a more difficult financing market, although it needs careful interpretation. Voya’s report, also dated Monday, puts institutional loan issuance at $2.9 billion for the week covered through October 22, down 71% from the preceding week. Refinancing nevertheless held relatively steady at $1 billion, investor demand remained positive, and its tracked loan index recorded no payment defaults that week. Fewer new deals therefore do not establish that borrowers have stopped paying or that refinancing has closed altogether.

For business development companies, which lend to businesses, the potential earnings pressure comes through two doors. A borrower refinancing at a higher rate has less cash left after interest, which can weaken its ability to service the loan; meanwhile, the lender may face higher costs when renewing its own financing. Wider spreads can also improve the income available on new loans, but only if those borrowers keep paying and the additional income exceeds funding costs and eventual losses.

Funds holding corporate loans or bonds face the same borrower economics, although their distributions also depend on their particular strategies and expenses. A fall in a fund’s market price does not by itself measure deterioration in the income supporting its payments.

Our view is that the growing divide deserves more attention than the headline yield on offer. This is evidence for greater care with weaker borrowers, not grounds to assume dividends across the universe are failing. Continued interest collections and successful refinancing would support that measured judgment; rising missed payments or funding difficulties spreading into stronger borrowers would make us materially more cautious.

Sources

• BNY: Stable investment-grade credit masks pressure in CCCs, October 26, 2026
• Voya: Senior Loan Talking Points, October 26, 2026

This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.