Default rates are set to rise across US and European high-yield (HY) and institutional leveraged loan (LL) markets in 2023 and 2024, says Fitch Ratings. Europe faces a unique binary risk to economic growth from natural gas supply disruptions that could cause defaults to exceed our expectations. Market Concern lists are growing in both regions as inflationary cost pressures and downgraded economic growth expectations weigh on credit profiles.
Our 2023 US default rate forecasts are 1.25% to 1.75% for HY and 1.50% to 2.00% for LL. The HY retail default rate could reach 10%, with Carvana and Bed, Bath & Beyond as potential drivers, and have an outsized impact on 2023 defaults, despite the sector’s relatively small size. Conversely, high commodity prices will likely keep defaults below average for energy, the largest HY sector.
In Europe, Fitch’s 2023 base case forecasts are 2.5% for HY and 3.0% for LL. Severe case forecasts for YE 2023 are 4% for HY and 5% for LL.
Fitch believes the 2024 US default rate could rise to 2% or higher for both HY and LL due to economic challenges likely to drive ratings downward. The /media sector has Diamond Sports on the Top Market Concern list, and the building materials sector could contribute significant default volume. In addition, there are sizeable HY issuers on our less worrisome Other Market At-Risk list.
US Market Concern Loans total USD192.9 billion, up 17% from end-1Q22. The majority of the increase occurred in the Other Market-At-Risk Issuer list, which is more likely to translate into potential 2024 defaults and could reach 2% or higher. The /pharmaceutical, /entertainment and /media sectors headline our US Top Market Concern LL list, with 58% of the total.
In Europe, Fitch-identified Bonds and Loans of Concern rose to 4.3% and 3.7%, respectively, in June. Most of the rise for HY was driven by real estate and consumer discretionary issuers, as well as issuers with maturing subordinated debt. Increasing Loans of Concern reflect credits with links to Russia or highly leveraged credits that amended and extended or failed to fully restructure operations and balance sheets upon default in 2020 and 2021.
