(Finance) – Gli high interest expense burdens will continue to prove challenging for highly leveraged speculative-grade companies in the United States and Europe, e will result in higher default rates of high-yield bonds and leveraged loans in 2024. Fitch Ratings says so in a new report on the topic, underlining that issuers of distressed bonds and loans appear “increasingly distressed from an operational perspective, generate low or negative FCF and/or cannot organically increase the EBITDA to reduce high debt burdens”.
THE total defaults in twelve months of corporate bond issuers and loans in the United States increased in 2023, from 1.6% in 2022 to 3.04% for leveraged loans and from 1.35% in 2022 to 2.99% for leveraged loans high yield as of December 20, 2023. The 12-month default rate in Europe is 2.8% as of end-November 2023.
Based on the number of loan originators engaged in restructuring processes, Fitch expects that i default rates European leveraged loan rates will rise to 3.0% by the year 2023 and towards 4% by the year 2024. The default rate of European developed market high yield bonds is 2.3% and is estimated to rise to 2.5% in the year 2023 and 4% in 2024.
In the United States, Fitch forecasts 2024 default rates of 3.5%-4.0% for leveraged loans and 5.0%-5.5% for high yield. Expectations of a higher default rate for 2024 reflect “continued macroeconomic headwinds, including the impact of continued high interest rates and a slowdown of the US economy in 2024 versus 2023,” the research reads. However, Fitch does not expect a recession for the United States in 2024.
Fitch expects “the high interest rate environment to ease only moderately in 2024 and expects defaults to be driven by sector-specific issues in the U.S. healthcare and pharmaceutical, telecommunications and technology sectors.” In Europe“the impact of the rate increase on demand conditions has been more pronounced” and the ratings agency expects increased stress on the part of issuers industrial and of cyclical consumption highly indebted, as well as issuers linked to the sector real estate sensitive to interest rates”.