(Bloomberg) -- The default rate for US companies will soar to 3.75% if the Federal Reserve’s fight against inflation only tips the economy into a shallow recession, according to S&P Global Ratings. A more serious downturn would send the rate to 6%.
Higher interest rates and consumer prices are expected to push 69 speculative-grade companies to fall behind on debt servicing by September 2023 in S&P’s baseline scenario, more than doubling the default rate from 1.6% a year earlier. That would be the highest since June 2021, surpassing the 10-year average of 3.1%, analysts led by Nick Kraemer wrote in a note on Monday.
The pessimist’s case, though, remains a risk. A whopping 6% of high-yield corporate issuers could default, the highest since March 2021, if a deeper or longer recession occurs. The long-term average, going back to 1981, stands at 4.1%.
“Much will depend on the length, breadth and depth of a recession should one occur, and if the Fed will continue to raise rates through a recession,” the S&P analysts wrote. “The current pace of widening yields in secondary markets would continue, while consumption would contract, forcing businesses to dig into their cash holdings to ride out a deeper recession.”
It’s a question that many on Wall Street are trying to answer as Fed officials reiterate their plans to send interest rates higher. But for S&P, a third-quarter rebound in the US economy, following two quarterly contractions, was more of a “last hurrah” than a clear indication of what lies ahead.
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