Amid tighter financial conditions and intensified stress in the banking system, forecasts for U.S. corporate loan and bond defaults are on the rise, Fitch Ratings says.
The rating agency raised its forecast range for the high-yield bond default rate for 2023 to 4.5%-5.0% from its previous forecast of 3.0%-3.5%.
It also raised the 2024 default forecast by 50 basis points to a range of 3.5%-4.5%.
At the same time, the leveraged loan default forecast was boosted to 4.0%-4.5% for 2023 from its prior call of 2.5%-3.0%, and Fitch increased the 2024 forecast range by 25 basis points to 3.5%-4.5%.
The revised forecasts imply cumulative default rates of 8.75% for high-yield bonds and 8.25% for leveraged loans, which would still be well below the default rates experienced during the global financial crisis (2007 to 2009) when those rates hit 22% and 14%, respectively, Fitch said.
The rating agency said the shifting forecasts reflect “the tighter lending conditions and capital access resulting from stress in the banking sector and inflation uncertainty.”
“These factors, along with higher borrowing costs are meaningful challenges to weaker issuers’ ability to address refinancing and liquidity needs,” it said. “Therefore, we expect an increase in bankruptcy filings and distressed debt exchanges.”