It’s the Golden Era for Credit! S&P: Corporate Defaults at Fastest Pace Since Financial Crisis
Corporate default rates increased at the fastest pace since 2009, with 15 default last month bringing the 2024 count to 29, according to a report from S&P Global Ratings. Higher for longer is taking its toll as Fed Funds, and thus SOFR, remains at the highest level in 20 years. 2024 YTD has seen 17 defaults in the U.S., plus 8 corporate defaults in Europe. Selective defaults as result of distressed exchanges represent ~60%, Chapter 11 comprise ~40%. S&P Global expects the European default rate to remain elevated at 4.07% in 2024, with the U.S. speculative-grade default rate rising to 4.71% in the U.S. (S&P classifies 221 U.S. companies & 49 European companies, as vulnerable), significantly higher default rate for loans v. bonds (see chart below, which tracks defaults through the cycles and current levels, as reported by Moody’s). The U.S. BSL and HY Bond default rate (by issuer count) is currently 6.22% and 3.75%, respectively.
The corporate default count in February include Radiology Partners, U.S. Healthcare, Cano Health, U.S. Healthcare, Apex Tools, U.S. Tool Manufacturer, Avison Young, Canadian Real Estate Services, Tribe Buyer, U.S. Staffing Firm, Hornblower, U.S. Ferry/Cruise Operator, Vue Entertainment, U.K. Cinemas, Range Parent, U.S. Control Systems, Enviva, U.S. Wood Pellets, AFE, U.K. Financial Service, GoTo, U.S. Software, Pluto, U.S. Health Care, Astro, U.S. Retailer.
The aforementioned data does not include private credit. In the private credit universe (sponsor and non-sponsor), default rates are hard to measure since banks and rating agencies simply do not have the data, and furthermore lenders have much more flexibility to amend the documents, avoid creditor-on-creditor violence/distressed exchanges/selective defaults. Having stated this, there’s a list of private credit LBO transactions with going-in leverage of 6x, who continue to miss revenue targets by a wide margin, particularly in tech & software as well as healthcare services (e.g., roll-ups – dental, eye care, renal, etc.), however, defaults/losses in private credit have extra room to be absorbed given higher interest rate/spread differentials earned in the private credit market v. BSL. Floating rate debt continues to be one of my favorite sectors given the attractive level of SOFR. Despite a rise in default rates, 90% of the market is performing well, allowing capital allocators the unique opportunity to invest in performing credit, while simultaneously capitalizing from distressed and dislocation.
It’s the Golden Era for Credit! |
