NEW YORK: S&P Global Ratings Credit Research & Insights said on Wednesday that it expects the US 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 US 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.
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