S&P Reports Increasing Instances of Persistent Defaults Among

2 min read

According to a recent report by S&P Global Ratings, the incidence of companies defaulting on their debt multiple times has reached its second highest level since 2008. In 2023, approximately 35% of global defaults were attributed to “re-defaulters,” a trend that is also impacting the recovery rates of these companies. Nicole Serino, Director of Credit Research and Insights at S&P, highlighted the rise in issuers with credit ratings of B- or below, indicating high debt levels, as a contributing factor to this trend.

Serino noted that these companies had established their capital structures during a period of low interest rates, anticipating a continuation of the same. However, as consumer inflation exceeded expectations, the likelihood of rate cuts by the Federal Reserve decreased. This “higher-for-longer” environment poses challenges for highly leveraged and high-risk companies, particularly those that have already experienced defaults.

The increase in re-defaults coincides with a growing preference among borrowers for distressed exchanges—an arrangement that inflicts losses upon creditors while allowing companies and their owners to avoid bankruptcy. S&P cautioned that such transactions only offer temporary relief to issuers in their recovery efforts, categorizing them as “selective defaults.”

The majority of borrowers in selective default were identified as re-rated CCC+, indicating a high probability of defaulting again, according to S&P’s analysis. The report further revealed that investors face greater losses on capital structures that have experienced multiple defaults, particularly in the case of senior unsecured bonds, where recovery rates dropped from approximately 60% to around 40%.

S&P’s estimates indicate that the speculative-grade default rate in the United States stood at 4.8% by the end of March. The default rate is measured as the percentage of issuers that defaulted over the trailing twelve months.

The findings from S&P’s report shed light on the concerning trend of repeated defaults among companies, exacerbated by the challenging economic landscape. Investors and market participants will need to closely monitor these developments and assess the risks associated with highly leveraged and low-rated entities.

You May Also Like

More From Author

+ There are no comments

Add yours