The corporate default rate surged in 2022, primarily due to the fallout from Russia’s invasion of Ukraine and turmoil in China’s property market, and they are set to rise even further in the year ahead, as growth slows and financial conditions tighten, Moody’s Investors Service says.
The rating agency reported that the global default rate for speculative-grade companies rose to 4.3% by the end of 2022, more than double the 1.8% rate that prevailed at the start of the year, as the number of defaults during the year almost tripled.
The year-end default rate surpassed the historical average of 4.1%, it noted, but it did not reach the levels seen during the immediate aftermath of the pandemic.
“Default volume climbed to US$146 billion in 2022, up from US$55 billion in 2021 but down from US$236 billion in 2020,” Moody’s reported. “The Russia-Ukraine war and China’s property sector downturn drove much of the increase.”
Looking ahead, the rating agency forecast that the annual default rate will decline in the first quarter, as the “wave of Russian defaults that occurred in 2022” drop out of the data — before rising to 4.4% by the end of 2023.
The increase in defaults this year is expected, “as some major economies enter into mild recessions and the effects of tighter financial conditions crystallize.”
Ultimately, Moody’s expects the default rate to peak at 4.6% in early 2024, before dropping back to 4.2% later in the year.
That forecast assumes that the “global economic recovery will be tepid,” Moody’s said, and that monetary policy will remain restrictive.
However, the rating agency also modelled several alternative scenarios.
Under its most optimistic condition, if the world’s major economies don’t contract and financial markets stabilize more quickly than expected, the default rate would fall to 4.0%.
However, in Moody’s “moderately pessimistic” scenario, the default rate would rise to 9.9% this year — and in the “severely pessimistic” scenario, the rate would jump to 15.0%, which is higher than the peak during the global financial crisis, when it reached 13.5%.
By sector, the rating agency sees default risk to be highest in consumer durable goods.
The report also noted that leveraged loan issuers will suffer more than bond issuers from higher interest rates because most loans carry floating rates.
“In addition, banks have tightened their lending standards in anticipation of a recession, making it more difficult for loan issuers to refinance, which will raise the risk of default, especially for financially weak issuers,” it said.