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High Yield 2022/2023 Default Outlook
CreditSights Staff
EXECUTIVE SUMMARY
- We are calling for the US HY issuer-weighted default rate to finish 2022 at 1.5%, and for the Euro HY issuer-weighted default rate to end the year at 1.0%. Default rates will continue to rise in 1H23, with US and Euro HY default rates reaching 2.5% and 3% respectively by mid-2023.
- During 1H22 seven US HY issuers and two Euro HY issuers defaulted on a total face value of $9.2 bn and €700 mn, respectively.
- US HY Energy fundamentals remained strong during 1H22 on the back of the sustained improvement in oil prices. As a result, we saw just one Energy issuer default during 1H22.
- The percentage of US HY and Euro HY issuers trading at distressed levels is currently 15.5% and 21.2% respectively. Both indices have seen their distress ratio rise above its 10-year average of 14% and 13% respectively.
- Although the bond market is pricing in US HY default rates close to historical averages over the next nine months, we do not see default rates reaching these levels in 1H23. High yield corporates benefited from unprecedented access to capital and margin expansion in 2021, leaving credit fundamentals in good shape to weather a deceleration in growth.
We saw an impressive economic rebound in 2021 on the back of extensive fiscal and monetary policy measures designed to support economic, consumer and corporate fundamentals. The Fed’s explicit support for credit markets drove borrowing costs to historic lows, facilitating access to very cheap capital for a wide range of companies. Many credits that would have otherwise struggled to raise cash/or roll over maturities benefited from broader market conditions, avoiding a potential liquidity event, distressed exchange or bankruptcy.
Since the beginning of 2022, credit market conditions have eroded as a duration-driven sell-off at the beginning of the year gave way to broader fears of a potential recession and selling pressure on lower-rated market segments. The Russia-Ukraine conflict and persistent lock-downs in China added to preexisting inflationary pressures, affirming a Hawkish stance from the FOMC and the ECB as both central banks attempt to put a damper on inflation by cooling demand.
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