December 29, 2023 (MLN): Elevated interest expense burdens will continue to prove challenging for highly levered speculative-grade companies in the U.S. and Europe and will result in higher yield bond and leveraged loan default rates in 2024, Fitch Ratings says in a new report.
Stressed bond and loan issuers appear increasingly operationally challenged, generate low or negative FCF, and cannot organically grow EBITDA to reduce high debt burdens.
Total-twelve-months (TTM) defaults from corporate bond and loan issuers in the U.S. rose in 2023, from 1.6% at YE22 to 3.04% for leveraged loans, and 1.35% at YE22 to 2.99% for high yield as of December 20, 2023.
The TTM European LL default rate from end-November 2023, is 2.8%. Based on the number of loan issuers in restructuring processes, the entity forecasts European LL default rates to rise to 3.0% by YE 2023, and toward 4% by 2024.
The developed-market European HY bond default rate is 2.3%, and Fitch estimate that it will rise to 2.5% at YE 2023, and 4% in 2024.
In the US, Fitch forecasts 2024 default rates of 3.5%-4.0% for leveraged loans, and 5.0%-5.5% for U.S. HY.
The higher default rate expectations for 2024 reflect ongoing macroeconomic headwinds, including the impact of still-high interest rates and a slowdown in the U.S. economy in 2024 relative to 2023. However, Fitch does not forecast a recession for the U.S. in 2024.
Fitch expects the high-interest rate environment will ease only moderately in 2024 and expects defaults to be driven by sector-specific issues in the healthcare and pharmaceutical, telecom and technology sectors in the U.S.
In Europe, the impact of rising rates on demand conditions has been more pronounced. The agency expects increasing stress from highly leveraged cyclical consumer and industrial issuers in addition to interest rate-sensitive real estate-related issuers.
