Amid a gloomier economic outlook and ongoing global trade conflict, Fitch Ratings expects more corporate credit defaults in the U.S. and Europe this year.
In a new report, the rating agency said that it has raised its default forecasts for high yield bonds and leveraged loans due to the deteriorating macroeconomic outlook prompted by the U.S. trade war.
Fitch recently lowered its global growth forecasts due to the surprisingly large U.S. tariffs, and the retaliation by other countries.
Against the backdrop, “Declining corporate margins and cash flows and higher-for-longer interest rates will make it harder for highly leveraged, stressed issuers to meet financial obligations,” it said.
Additionally, financial market conditions have deteriorated, “causing a sharp pullback in leveraged loan and high yield activity, reduced liquidity and wider credit spreads,” it said.
The prospects for a revival in merger and acquisition activity, or leveraged buyouts, have also retreated, amid heightened uncertainty, it noted.
While private debt is often an alternative source of funding during market disruptions, “they are unlikely to provide refuge for issuers with significant operational challenges or those in cyclical sectors,” Fitch said.
As a result, its forecast for the default rate for high-yield bonds this year has been increased to 4%-4.5%, and the forecast for leveraged loan defaults was raised to 5.5%-6%. Its forecast for high yield bond defaults in Europe is now for a rate of 5%-5.5%, with the forecast for leveraged loans at 2.5%-3%.
“In the U.S., we anticipate higher default activity from tariffs sensitive sectors including autos, retailers and technology hardware,” it said.
Similarly, in Europe, Fitch expects U.S. tariffs to impact, “the automotive, manufacturing, chemical and technology hardware sectors via rising input costs and/or lower demand.
“Many more sectors will be indirectly affected as consumer spending and business investment decrease due to economic uncertainty,” it added.