European corporate default rates on the rise due to higher interest rates

April 30, 2024 (MLN): The increasing cost of capital is driving European corporate default rates up, as higher-for-longer interest rates continue to weigh on their debt service and interest coverage ratios, Fitch Ratings says in its latest European Distressed & Default Monitor report.

The trailing 12-month (TTM) developed market high-yield bond default rate in Europe rose to 1.8% in March 2024 from 1.6% the previous month, driven by the distressed debt exchange (DDE) from the French facility management company Atalian in March that extended maturities and reduced annual interest expense.

The European leveraged loan TTM default rate as of March 2024 declined slightly to 3.8% due to the exit of several defaults from the time period. We expect bond default rates to continue to rise in 2Q24 towards our 4% YE24 forecast for both loans and bonds.

Our Market Concern Bond list rose in March 2024 to 5.9%, up from the 3.4% share in February 2024. The Market Concern Loan list also saw an uptick month on month, to 3.1% from 2.5%.

The increase in volume across the Concern lists indicates growing concern over future potential defaults, consistent with our expectation that default rates for bonds and loans will reach the 4% mark.

Defaulted names often return to Concern lists as initial DDEs do not adequately address long-term balance sheet sustainability, with many defaulting again within 24 months. Recent examples include Vue Cinemas and Keter.

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