Warning signs ranked by severity
| Warning Sign | Why It Matters | Severity |
|---|---|---|
| Declining EBITDA margins (3+ qtrs) | Cash flow generation is weakening | High |
| Rising leverage without growth | Borrowing to survive, not invest | High |
| Revolver draws | Tapping emergency credit lines | Very High |
| Dividend cuts/suspension | Preserving cash at equity holders' expense | High |
| CFO/CEO departure | Insiders leaving before problems surface | Medium–High |
| Covenant amendments | Lenders loosening terms (forbearance) | Very High |
| Supplier payment delays | Stretching payables to manage cash | High |
The most dangerous combination: revolver draws and dividend cuts
The most dangerous phase is when a company starts drawing on its revolving credit facility while simultaneously cutting dividends. This combination signals severe cash flow stress and often precedes restructuring.
Scan a 10-Q for distress signals
Reading converging warning signs together
Why bond markets lag deteriorating fundamentals
When management calls deterioration temporary
Non-accrual: when a lender stops recording the interest
A loan goes on non-accrual when the lender no longer expects to collect the interest it is owed — usually once the loan is well past due — and stops recording that interest as income. For a business development company (BDC) — a lender whose entire book is private loans — the share of the debt book on non-accrual, reported every quarter, measures how much of the book has stopped performing. A rising non-accrual rate is one of the clearest signs of credit deterioration in a loan portfolio, though the timing of the designation is partly management's judgment. The rate shown next is measured at fair value; a BDC also reports a higher figure at amortized cost, because troubled loans are marked down before they stop accruing.
A real BDC's non-accrual rate, from its latest filing
Sit with the ideas.
A BB-rated company reports: EBITDA margin declining from 22% to 17% over 4 quarters, leverage rising from 4.5x to 5.8x, and it just drew $300M on its $500M revolver. What is the most appropriate action for a bond investor?