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S&P projects rising speculative-grade corporate default rate

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Amid expectations for an economic slowdown and limited impact of recent Fed rate cuts, S&P Global Ratings is projecting a greater rise in speculative-grade corporate defaults by next year.

In a report issued Wednesday, S&P published its base forecast 12-month trailing default rate at 3.9% by September 2020, from the 2.8% rate in September 2019.

In a pessimistic scenario in which the U.S.-China trade dispute spirals into wider tariff wars, the default rate could hit as high as 5.2%, S&P’s report stated.

Last month, S&P was projecting a future speculative-grade default rate of 3.4% by June 2020.

“While broadly neutral, financing conditions are tighter for lower-rated issuers in the 'B' and 'CCC/C' categories; which are seeing spreads widen at a faster pace than 'BB', alongside a downward trend in issuance this year,” S&P’s report stated.

Leading the way on defaults will likely be consumer services and energy sector firms, which make up 43.2% of all U.S. firms with the near-default triple-C ratings issued by S&P. Those two sectors constitute the majority of defaults in recent years, according to S&P – which noted the default rate excluding those two sectors was only 1.52% for the 12 months ending Sept. 30.

Leveraged loan issuance totaled $435.5 billion through the end of October, compared to $573.1 billion a year ago in the same year-to-date period, S&P’s report stated.

Moody’s Investors Service has forecast a 3.7% speculative-grade corporate default rate by October 2020.

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Corporate defaults S&P
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