More junk-rated US companies to default in Q1, Moody's forecasts

Defaults by US companies with low junk credit ratings are likely to rise further in the first quarter of 2024, according to a Thursday (Jan 18) report by credit rating agency Moody’s Investors Service.

Defaults among the lowest-rated US companies will peak at 5.8 per cent this quarter from 5.3 per cent in November before levelling out to 4.1 per cent by the end of 2024, Moody’s analysts said.

Moody’s counts 238 corporate borrowers on its “B3 Negative and Lower” list in the fourth quarter of 2023, compared with 218 a year ago. Moody’s believes these companies have a higher probability of defaulting on debt.

This accounts for 16 per cent of US speculative-grade names, the highest share since mid-2021. Names added to the list last quarter include radio platform iHeart Communications and Spirit Airlines, whose proposed merger with peer JetBlue was blocked on Tuesday.

The majority of defaults in the fourth quarter were by private equity-owned companies that opted for distressed exchanges to modify their existing debt and avoid bankruptcy, according to the report.

At the same time as defaults have risen, the ratio of Moody’s downgrades to upgrades among speculative-grade companies grew to 1.8x in the fourth quarter of 2023, up from 1.3x in the previous quarter.

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“Downgrades reflected a range of challenges including weakening liquidity, deteriorating operational performance, declining earnings, high financial leverage and increased refinancing risk,” Moody’s analysts wrote.

Healthcare companies made up the largest share of companies on Moody’s list and faced high risk of default, the report noted.

Moody’s highlighted in October that junk-rated firms have US$1.87 trillion of debt maturing between 2024 and 2028.

As debt matures in 2024, these borrowers will struggle to refinance or access new debt, Moody’s noted. This is despite market expectations for the Federal Reserve to begin cutting rates later this year. REUTERS