Corporate Debt Defaults Surge in 2023

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S&P Global Ratings has reported a significant increase in corporate debt defaults in 2023, with 153 companies failing to meet required debt payments, up from 85 the previous year—an 80% rise. This marks the highest default rate, excluding the Covid-related spike in 2020, in seven years. The defaults were primarily seen in low-rated companies facing negative cash flows, high debt levels, and weak liquidity, with consumer-facing sectors, especially media and entertainment, leading the way.

Concerns have been raised about the potential for challenges in 2024, as cash-strapped companies grapple with the burden of high interest rates. The Federal Reserve notes that corporate America carries a $13.7 trillion debt load, having increased by 18.3% since 2020 when companies took advantage of the Fed’s interest rate cuts during the early days of the Covid-19 pandemic.

S&P anticipates further global credit deterioration in 2024, particularly for lower-rated entities (‘B-‘ or below), where nearly 40% of issuers are at risk of downgrades. Despite the prospect of rate cuts, financing costs are expected to remain elevated. The report also highlights concerns about a large share of speculative-grade debt maturing in 2025 and 2026.

Economists are wary of a potential “corporate debt cliff” as a substantial portion of maturing debt, initially financed at low rates, comes due in the next few years. S&P suggests that slower economic growth and higher financing costs could contribute to more widespread defaults. While media and entertainment, consumer products, and retail are identified as potential trouble spots due to a weaker economy, the impact is expected to extend to sectors like healthcare, facing challenges from elevated debt and staffing issues constraining revenue.

While Fed rate cuts are expected to alleviate some of the burden, rates are anticipated to remain elevated through at least 2024. Market expectations of significant rate cuts clash with a more cautious approach indicated by Fed officials, suggesting a potential source of uncertainty in the coming months.