Following the sharp rise in central banks interest rates, a number of voices have warned that corporate defaults could increase significantly and even triple, because of the higher carrying cost of debt burdens in markets that are slowing down, Morningstar reported. However, these fears have not materialized — yet. The U.S. high yield corporate credit spread (difference in yield between high yield corporate bonds and government bonds) presently stands at only just over 4%. At the end of 2022, the trailing default rate of non-investment-grade rated companies was at a historically low 1.7%, according to S&P Global Ratings. In Q1 2023, two companies received a rating upgrade (“rising stars”) and none were downgraded (“fallen angels”). It was the same story all through 2022 and 2021, when 60 stars rose and only 22 angels fell, a trend contrary to the norm. Similarly encouraging numbers hold for bankruptcies. At the end of Q1 2023, total bankruptcy filings in the U.S. amounted to 14,467, reports Yanick Desnoyers, senior vice president and chief economist at Addenda Capital. “Pre-COVID, they numbered 22,780 over a same one-year period, and in 2009, during the GFC, 61,000,” he recalls. It is the same situation in Canada: for the year ending in April 2023, the country registered 2,855 bankruptcies, compared to 2,746 pre-COVID and 6,100 in 2009. Desnoyers is surprised to discover that net interest payments in the Federal Reserve flow of funds data are only U.S.$225 billion while they were just under U.S. $300 billion in early 2021. “That fall of U.S. $75 billion means that many companies have taken advantage of the lower rates that prevailed in 2021 and 2022 to emit a lot of debt and lock in low rates,” he says. That causes the debt-to-equity ratio to stand at 25% in the US, while it held at 27% pre-COVID, and towered at 60% in 2009.
