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The ranks of companies that are at risk of falling into junk bond territory is on the rise, Moody’s Investors Service says.

In a new report, the rating agency said the number of issuers on the brink of rating downgrades that would take them from investment grade to junk bond status increased by six in the third quarter, to 42.

“As interest rates remain elevated to fight inflation and economic growth weakens, the number of potential fallen angels may rise further,” it said.

The amount of debt that’s at risk of dropping to junk also rose substantially to US$312 billion by the end of the period, up from US$219 billion at the start of the quarter, Moody’s said.

This was also slightly above the five-year average over the 2017 to 2022 period.

The increase in the debt load that’s at risk of a downgrade came primarily from companies being added to the list (US$108 billion worth), with additional borrowing by companies that were already at risk adding US$15 billion — this was partly offset by US$30 billion worth of debt exiting the list, it noted.

Moody’s reported that about US$23 billion in new at-risk debt was contributed by U.S. issuers, while US$70 billion came from foreign firms, “driven by deteriorating credit fundamentals for Chinese property developers.”

Indeed, over a third (36%) of the potential downgrades to junk are located in the Asia-Pacific region, with 29% in North America, it said.

During the quarter, seven companies were downgraded to speculative grade, while five were upgraded from junk to investment grade in the third quarter, Moody’s noted.