Outlook 2024: Higher corporate defaults likely as volatility mounts, default candidates grow

By Cristal Cody

Tupelo, Miss., Dec. 29 – Corporate defaults are expected to climb in 2024 on a wave of volatility amid high inflation, the November elections, wars and other geopolitical events.

No U.S. bond defaults were reported in December with the year-to-date tally standing at $33 billion in bonds and $41 billion in loans, according to a BofA Securities Inc. research report.

The potential for more remains, though. BofA said its fallen angel candidate list has grown to $37 billion, offsetting the $36 billion of potential rising stars.

Downgrades in the junk space have exceeded upgrades by $72 billion versus a $38 billion margin over the past three months, BofA said in December.

In November, there were 14 defaults bringing the year-to-date number to 141, according to a S&P Global Ratings notice.

Distressed exchanges were the most common reason for defaults, making up over 70% of November defaults.

Several sectors handled the brunt of defaults, while other spaces also saw some defaults and bankruptcies.

“Year-to-date global defaults in the media and entertainment sector matched a pandemic-era high, and we expect further deterioration in consumer-facing sectors in 2024,” Nicole Serino of S&P Global Ratings Credit Research & Insights said in a release.

S&P Global Ratings Credit Research & Insights said it expects the U.S. trailing-12-month speculative-grade corporate default rate to reach 5% by September – above the 4.1% long-term average.

“If, as we expect, unemployment rises and discretionary spending declines, consumer-reliant sectors, which make up roughly half of borrowers in the ‘CCC/C’ categories, will suffer most,” S&P said.

A year ago, in December 2022, the global default rate for speculative-grade financial and nonfinancial companies rose to 4.3% for the trailing 12 months, more than double the 1.8% rate a year earlier and exceeding the long-term average of 4.1%, according to a Moody’s Investors Service report.

In 2022, the number of Moody’s-rated global corporate issuers that defaulted rose to 156 from 55 in 2021 but remained down from 217 defaults in 2020. Default volume climbed to $146 billion in 2022, up from $55 billion in 2021 but down from $236 billion in 2020, Moody’s said.

If 2024 comes and goes with no rate cuts by the Federal Reserve, high-yield defaults could rise to 8% to 10% across many sectors, according to a note from Oleg Melentyev, head of U.S. high-yield strategy at BofA Securities.

Default candidates

The list of corporate default candidates grew by the end of 2023 and tracked heavily in health care, media and retail names.

Default candidates included DISH DBS Corp. and Altice Group in cable, Staples Inc., QVC Inc. and Michaels Cos. Inc. in retail, CommScope Inc. and Zayo Group Holdings Inc. in technology, Level 3 Financing, Inc. in telecommunications, Community Health Systems Inc. in health care and iHeartCommunications Inc. in media.

“In terms of general thoughts on sector positioning, we continue to expect 90% of defaults to play out in three broad areas: TMT [telecoms, media, technology], cable, and health care,” BofA said. “These sectors are trading wide to the index – averaging 550 bps here – but this premium is there for a reason. With the exception of media, where projected defaults are the lowest in this group at only 6% (mostly through iHeart), other areas are looking at defaults in the 10-15% context, which leaves them with an average of credit loss of around 400-450 bp.”

Fitch Ratings also forecasts corporate high-yield and leveraged loan default rates to rise in 2024 from 2023 levels.

The ratings agency expects 2024 default rates of 3½% to 4% for leveraged loans and 5% to 5½% for the high-yield space, up from 2023 default forecasts of 3% to 3½%.

Defaults are expected to be driven by issues in the health care and pharmaceutical, telecom and technology sectors, Fitch said.

Higher junk default rates in 2024 are expected as fixed-rate debt approaches maturity, and issuers may be forced to refinance at elevated rates, potentially into floating-rate debt or distressed debt exchanges, Fitch said.

“Higher default rate expectations for 2024 reflect growing macroeconomic headwinds, including the impact of higher-for-longer interest rates and a sharp slowdown in the U.S. economy,” Fitch said.

© 2015 Prospect News.
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