Amid a weakening economic and financial environment, the default rate for U.S. private credit borrowers rose in May, according to Fitch Ratings.
The rating agency reported that the trailing 12-month default rate for private credit rose to 4.6% last month, up from 4.4% the previous month.
There were eight defaults in May, including seven new defaulters and one repeat offender, Fitch noted — a “sharp increase” from the two defaults recorded in March and just one in April.
“The increase reflects a weakening North American corporate credit environment and ongoing macroeconomic challenges such as higher interest rates and slowing growth,” Fitch said.
The rating agency said its revised forecast for just one rate cut by the U.S. Federal Reserve Board this year “means continued pressure on cash flow and liquidity across the market.”
Amid higher rates and a deteriorating economic outlook, Fitch said it expects the default rate for private credit to “remain elevated” for the rest of the year.
It recently downgraded its outlook for the leveraged finance market to “deteriorating” from “neutral” and is now forecasting higher default rates for U.S. leveraged loans and high-yield bonds in 2025.
“Sharply lower GDP growth expectations of 1.2% (down from 2.8% in 2024), rising inflation, and increased policy uncertainty are key factors supporting the downgrade in the outlook,” it said.
Additionally, Fitch recently downgraded its outlook for North American corporates overall to “deteriorating” due to heightened concerns about inflation and GDP growth, driven by rapidly shifting U.S. trade policy. The shift has also increased regulatory and policy uncertainty generally.
The downgrade followed outlook cuts for several specific industries, including oil and gas, retail and consumer sectors, restaurants, healthcare, transportation and chemicals.