Company debt defaults soared 80% in 2023 and could possibly be excessive once more this yr, S&P says

Company debt defaults soared final yr and could possibly be an issue once more in 2024 as cash-strapped corporations cope with the burden of excessive rates of interest, S&P International Scores reported Tuesday.

The variety of corporations that did not make required funds on their debt totaled 153 for 2023, up from 85 the yr earlier than, a rise of 80%. It was the very best default price outdoors of the Covid-related spike in 2020 in seven years.

A lot of the full got here from low-rated corporations that had damaging money flows, excessive debt burdens and weak liquidity, S&P mentioned. From a sector standpoint, consumer-facing corporations — media and leisure particularly — led the defaults.

S&P mentioned there could possibly be onerous occasions forward for company America, which, in accordance with the Federal Reserve, is carrying a $13.7 trillion debt load. Firm debt has jumped by 18.3% since 2020 as corporations took benefit of the Fed slashing rates of interest within the early days of the Covid pandemic.

“In 2024, we expect further credit deterioration globally, predominantly at the lower end of the rating scale (rated ‘B-‘ or below), where close to 40% of issuers are at risk of downgrades,” the agency wrote. “We expect financing costs to remain elevated despite the prospect of rate cuts. And while borrowers have reduced their 2024 maturities, a large share of speculative-grade debt is expected to mature in 2025 and 2026.”

Some economists fear {that a} “corporate debt cliff” might grow to be a extra significant issue as a big share of maturing debt that originally was financed at very low charges comes due within the subsequent few years.

The burden, each within the U.S. and globally, could possibly be exacerbated by “slower economic growth and higher financing costs” that would contribute to defaults, S&P mentioned. Together with media and leisure, the agency sees potential hassle spots in shopper produces and retail due to a weaker economic system “and the already elevated number of weakest links in those sectors.”

However the injury will not be remoted in these areas, as S&P sees increased charges inflicting extra widespread ache to sectors resembling well being care, which is affected by elevated debt and staffing issues which can be constraining income.

Fed price cuts are anticipated to alleviate the burden considerably, although charges are anticipated to stay elevated a minimum of by way of 2024. Whereas markets assume the central financial institution might however short-term charges by as a lot as 1.5 share factors this yr, Fed officers have indicated a slower course of maybe half that a lot, relying on how the inflation information unfolds.