(Bloomberg) --Defaults are expected to rise among the riskiest companies, as central banks hold interest rates near peak levels while tighter lending conditions and elevated input costs weigh on borrowers, according to Moody's Investors Service.
That "will set the stage" for more defaults across firms with weak earnings and heavy debt burdens, particularly those borrowing mainly in the loan market, strategists including Sharon Ou wrote in a June 15 note.
Moody's expects speculative-grade corporate defaults to climb to 4.6% by the end of the year — higher than the 4.1% long-term average — and peak at 5% by the end of April 2024, before easing to 4.9% in May.
The forecast assumes US high-yield spreads will widen to 532 basis points over the next four quarters, from about 460 basis points at the end of May, with US unemployment rising to 4.8% from 3.7% in the same period. It also assumes a slowdown in global economic growth that will continue into next year.
Through May of this year, the 12-month global high-yield default rate rose to 3.4%, from 3.2% at the end of April.
Read more on defaults:
Fed Pause Will Widen Spreads, Up Defaults, Says Morgan Stanley
Fitch Sees US Junk Bond Default Rate 4.5%-5% to End 2023
Deutsche Bank Sees US Leveraged Loan Defaults Peaking at 11%
Private Lenders Hire Restructuring Pros as Defaults Loom
For high-yield bonds, the global default rate stood at 1.2% in May — unchanged from April — while in the US, it dropped to 1.3% from 1.4% and held steady in Europe at 0.7%. In the US leveraged loan market, defaults increased to 3.4% at of the end of May from 3.2% in April — versus 1.5% a year ago.
So far this year, Moody's has recorded 62 corporate defaults globally. North America had the highest concentration — split between 41 in the US and one in Canada — compared to just 16 over the same period last year. Europe has seen 11 defaults in 2023, followed by seven in Latin America and two in the Asia-Pacific region. In May alone, 16 corporate debt issuers defaulted globally, up from 12 in April.
The Moody's strategists noted that the five sectors with the most defaults this year span business services, healthcare and pharmaceuticals, retail, telecommunications, as well as hotel, gaming and leisure.
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