LONDON- The specter of rising corporate debt defaults exacerbating a global economic slowdown has for months been largely brushed aside by resilient credit markets.
Now, long-feared corporate debt woes are starting to hit home, while more companies are being downgraded to a junk credit rating – facing higher borrowing costs as a result.
Retailer Casino, with 6.4 billion euros ($7.19 billion) of net debt, is in court-backed talks with creditors; Britain’s Thames Water is in the headlines with its 14 billion pound ($18.32 billion) debt pile.
Swedish landlord downgraded to junk in May, is at the epicenter of a property crash that threatens to engulf Sweden’s economy.
Yet the cost of insuring exposure to a basket of European junk-rated corporates last week briefly hit its lowest in just over a year, suggesting investors remain unperturbed by rising default risks.
“You have a lot of complacency in the market, if you think that statistics show that we have had already as many defaults globally in the first five months of 2023 as in the whole 2022,” said Julius Baer’s head of fixed income research Markus Allenspach.
“But there are still inflows into high yields (bonds),” he said.
S&P Global expects default rates for US and European sub-investment grade companies to rise to 4.25 percent and 3.6 percent respectively by March 2024, from 2.5 percent and 2.8 percent this March.
Hopes the world economy will avoid a sharp downturn and that aggressive rate hikes will soon end explain the upbeat sentiment.
But analysts note the impact of rate rises has yet to be fully felt.
For some, this means corporate bond yields should command a higher premium. The current spread on the ICE BofA global high yield bond index is at 435 basis points (bps), down from 622 bps a year ago.
