Junk defaults to stay low, even as risks rise

Despite rising economic and financial stresses, the default rate for U.S. high yield debt is still projected to reach just 1% this year, Fitch Ratings says.

In a new report, the rating agency said that its projected default rate for 2022 remains unchanged, notwithstanding an increase in activity last month that saw defaults hit US$4.6 billion. That was the highest level since the period following the onset of the pandemic, in July 2020.

“There are only a handful of high yield issuers that are at risk of defaulting over the remainder of the year,” said Eric Rosenthal, senior director at Fitch, in a release.

Looking further out to 2023, Fitch is also maintaining its default forecast at 1% to 1.5%.

“Russia-Ukraine exposure is low and high yield issuers have shored up liquidity during the pandemic,” said Rosenthal. “Also, higher commodity prices should provide a boost for energy credits, which comprise the largest share of the high yield market at 13%.”

That said, the firm noted that factors such as prolonged inflation, faster than expected tightening of monetary policy, and a significant slowdown in economic growth, “could further stress lower-rated issuers and lead to higher than expected defaults in 2023.”

Fitch recently revised its U.S. GDP growth forecast for 2022 down to 3.5% from 3.7%, and its forecast for 2023 down to 1.6% from 1.9%, noting that, “the global recession risk is rising.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.