S&P sees corp high-yield default rate doubling by year end
3:05 pm Wednesday, March 29th, 2023
(Reuters) – S&P Global Ratings Credit Research & Insights said on Wednesday that it expects the U.S. trailing 12-month speculative-grade corporate default rate to reach 4% by December, more than double the 1.7% default rate at the end of December 2022.
“If, as we expect, unemployment rises and discretionary spending erodes, consumer-reliant sectors, which make up roughly half of borrowers in the ‘CCC’ to ‘C’ categories, will suffer most,” S&P analysts wrote.
Retail borrowers have driven defaults so far this year, as consumers feel the pinch of inflation and increasing debt burdens, the analysts note.
Speculative-grade corporate borrowers rated B-minus or lower had roughly $570 billion in floating-rate debt on their books as of Jan. 1.
The greatest concentration of floating-rate debt lies among speculative-grade borrowers in high technology, health care, and media and entertainment, among others.
Floating-rate debt exposure presents greater liquidity strains on borrowers than fixed-rate debt, as their interest rates move in tandem with the U.S. Federal Reserve’s rate hikes to combat inflation.
The S&P analysts said that while they expect the Fed to commit just one more quarter-point rate hike by year-end, it is unlikely the central bank will lower its peak 5.0%-5.25% federal funds rate until the first half of 2024.
In addition to higher debt-servicing costs, small-to-midsized speculative borrowers face great risk in refinancing this debt at more favorable terms.
Banks are expected to implement stricter lending standards, in part due to the recent regional bank fallout and resulting shakeup of investor confidence.
“While we don’t at this point expect the reaction to recent events to evolve into a full-on ‘credit crunch,’ some borrowers may find financing options available much more costly or, in some cases, unavailable,” the S&P analysts wrote.
(Reporting by Alden Bentley and Matt Tracy; Editing by Leslie Adler)
