BUSINESSES and investors should be cautious in issuing junk bonds which are repaid in kind, central bankers group the Bank of International Settlements (BIS) said yesterday.
The sustained low-rate era may have given financial markets an excessive sense of security, the report said, warning a rate hike could spell trouble in the sector.
BIS is particularly concerned about bonds that are repaid with more debt.
“A low interest rate environment naturally fosters cheap and ample credit. Coupled with the reluctance of crisis-scarred creditors to recognise losses, this can facilitate refinancing and keep troubled borrowers afloat,” the report said.
“If such a process is indeed at work, its sustainability will no doubt be tested by the eventual normalisation of the monetary policy stance.”