(Bloomberg) -- The share of companies failing to pay debt on time could soar more than threefold in the next year due to a liquidity squeeze and worsening trading conditions, according to Moody’s Investor Services. 

“If interest rates continue to surge and the global economic slowdown deepens, weaker speculative grade companies face declining earnings and escalating debt costs. In that scenario, defaults will escalate,” Moody’s analysts wrote in the report published Monday. 

In the US, default rates could grow from below 2% to 7.8% by August 2023 in a more pessimistic forecast, while reaching 6.5% in that time in the EMEA region from about 2%, according to the report.  

Read more: A $1 Trillion Burden Looms for World Borrowers Refinancing Debt

Borrowers rated B2 and B3 --five and six notches deep into junk territory-- represent 65% of speculative grade companies in the US and Europe, Middle East and Africa, the analysts said. 

The drought in new issuance -- global leveraged finance issuance was about $315 billion from a record $1.6 trillion in 2021 for bonds and loans, according to Moody’s data-- points to tougher conditions for companies looking to refinance or add debt to get extra liquidity. 

One feature that could delay --or in some cases even avert-- defaults is the loose covenants in the debt documents most borrowers managed to achieve when they locked in new financing in a frothy market, according to Moody’s. That would provide them more flexibility to add debt without breaching covenants, but would also mean lower recoveries in the event of a default, they added.  

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