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Global corporate defaults surged in December, according to a report by rating agency Moody’s, setting the stage for more missed debt payments ahead as low-grade, highly leveraged businesses grapple with a prolonged period of steep funding costs.
Twenty companies rated by Moody’s defaulted on their debt last month, up from four in November, lifting the annual count to 159. That took the global 12-month trailing corporate default rate to 4.8 per cent by December, the highest rate since the year to May 2021 — a period that included bankruptcies linked to the economic fallout from the coronavirus pandemic.
“High funding costs, together with tighter financing conditions . . . prompted a rise in corporate defaults during 2023,” wrote Moody’s.
More than half of December’s defaults related to US-based companies, but a further eight were in Europe. That is the highest count for the region since the global financial crisis 15 years ago, excluding war and sanction-related corporate failures in Russia and Ukraine.
The latest default tally underscores the challenges still facing lowly rated borrowers across the globe, after interest rates in the US rose from near-zero two years ago to more than 5 per cent last year. The sharp increase has put particular pressure on loan issuers, whose debt payments typically float up and down with prevailing borrowing costs.
“Caution is still required because the market embodies a very optimistic view of rate cuts, by the Federal Reserve in particular,” said Marty Fridson, chief investment officer of Lehmann, Livian, Fridson Advisors. “There are sectors of the economy for which complacency would be a dangerous stance.”
The two worst-hit sectors by default count last year were what Moody’s classifies as “business services” and healthcare, with 15 and 13 defaults respectively.
Among bankruptcies late last year were US medical ambulance group Air Methods, which cited its “unsustainable” debt load, while personal loan marketplace LendingTree implemented a transaction known as a “distressed exchange”, classified by Moody’s as a default.
Other companies that Moody’s counted among defaults in December included US cinema advertising company Screenvision, cinema chain AMC Entertainment and German cable provider Tele Columbus.
Moody’s expects business services, healthcare and “high-tech industries” to have the most defaults this year. US healthcare is under pressure as labour and interest costs rise, following a dealmaking boom in which many firms took on large amounts of floating-rate loans.
A separate report released on Tuesday by S&P Global Ratings painted a similar picture, with global defaults jumping by four-fifths last year to 153.
Its analysts expect sectors exposed to consumer spending, including media and entertainment, to “lead defaults in 2024, given our expectation of slower global economic growth and the already elevated number of weakest links in those sectors”. Weakest links pertain to companies rated “B minus” and lower with negative outlooks.
Financial markets have proved volatile this month, following a sharp rally in late 2023 as investors cranked up their bets that central banks would slash interest rates imminently. Still, the US junk bond “spread” — the premium paid by risky borrowers to issue debt over their government counterparts — remains relatively tight, at just 3.58 percentage points, down from a recent peak of almost 6 percentage points in mid-2022.
Some investors believe such pricing may be overly optimistic and does not take account of persistent uncertainty over the monetary policy outlook and the health of the global economy.
For Moody’s analysts, “the pace of interest rate cuts in major economies will be more gradual than those of rate hikes, leaving interest rates to remain higher for longer”.
The rating agency’s baseline scenario is for the global default rate to peak at 4.9 per cent in the first three months of 2024, before declining “more modestly and gradually” than it did in both the 2008-09 crisis and the 2020 pandemic, to reach roughly 3.7 per cent by the end of the year.
But in a “severely pessimistic” situation, that rate could reach 11.5 per cent, it added.
Source: Economy - ft.com
