The prospects of U.S. companies with significant leverage or rated several notches below investment grade have turned bleaker in recent months, credit-rating firms say, and default rates for junk-rated companies could more than double by early next year, the Wall Street Journal reported. While highly rated companies are proving largely resilient during the postpandemic economic turbulence, businesses with lower credit ratings and floating-rate debt are increasingly struggling with steep increases to debt-servicing costs and a possible recession as the Federal Reserve continues interest-rate hikes. What’s more, still-steep inflation and softer demand are also expected to erode some companies’ profit margins, the ratings firms said. The higher borrowing costs for risky credit are resulting in more rating downgrades and an acceleration of defaults. Default rates for low-rated U.S. companies will likely hit 5.4% in February 2024, up from 2.5% in February 2023 and higher than the long-term average of 4.7%, ratings firm Moody’s Investors Service said in a report last month. A recession as well as an increase in unemployment and wider credit spreads, or the difference in corporate bonds compared with that of safe Treasurys, could cause defaults to rise further, Moody’s said.
