Rising Default Risks Among Junk-Rated US Companies, Moody’s Reports

A Troubling Trend in Corporate Defaults

The first quarter of 2024 is set to witness a spike in defaults among US companies with low junk credit ratings, as per Moody’s Investors Service. This uptick follows a concerning trend, with default rates projected to peak at 5.8% this quarter, up from 5.3% in November, before potentially stabilizing to 4.1% by year-end. The increase underscores the financial strains affecting the lower end of the corporate credit spectrum.

Escalating Risks for Speculative-Grade Borrowers

Moody’s has identified a worrying uptick in corporate borrowers classified as “B3 Negative and Lower,” with 238 entities listed in the fourth quarter of 2023, marking an increase from 218 the previous year. This category, accounting for 16% of US speculative-grade names, represents companies at a heightened risk of defaulting on their obligations. High-profile entities like iHeart Communications and Spirit Airlines have recently been added to this list, the latter following the blockage of its proposed merger with JetBlue.

Distressed Exchanges and Downgrade Surge

Amidst the rising defaults, a significant portion involves private equity-owned firms opting for distressed exchanges, a strategy aimed at restructuring existing debt to avert bankruptcy. Concurrently, Moody’s downgrade-to-upgrade ratio among speculative-grade companies has escalated to 1.8x in the fourth quarter of 2023 from 1.3x in the preceding quarter. These downgrades reflect a myriad of challenges including diminishing liquidity, operational downturns, declining earnings, high financial leverage, and amplified refinancing risks.

Healthcare Sector’s Heightened Vulnerability

The healthcare sector notably constitutes the largest portion of companies on Moody’s list, indicating a sector-specific vulnerability to default risks. Furthermore, junk-rated firms are facing a looming debt maturity wall, with $1.87 trillion due between 2024 and 2028, highlighting the critical need for these companies to address their financial stability in the face of a challenging economic environment.

As we move through the first quarter of 2024, the mounting default rates among junk-rated US companies reflect broader economic pressures and underscore the importance of robust risk management and financial strategy adjustments in the face of an evolving credit landscape.