S&P forecasts U.S. corporate defaults to more than double

S&P Global Ratings predicts that the corporate default rate could reach 3.75%. This will likely happen if the U.S. Fed, instead of lowering inflation, achieves a slight economic downturn through its actions. In case of the recession, the projected rate increases to 6%.

S&P predicts that 69 speculative-grade companies will fall behind on debt service by September 2023 as interest rates will be too high. This will also lead to a doubling of the corporate default rate, which a year ago was 1.6%. Thus, the decade average of 3.1% will be surpassed.

A scenario in which the corporate default rate reaches 6% can’t be ruled out. If the Fed fails to prevent a recession, the scenario becomes quite probable. The 6% figure is the highest in the last 1.5 years. Over the past 20 years, the long-term average is 4.1%.

According to S&P analysts, everything will depend on two factors. That is, it’s important to pay attention to the nature of recession and whether the Fed officials will raise interest rates during it. It’s likely that the rate of widening yields in secondary markets will remain the same, while, on the contrary, the consumption will fall. Thus, it may lead to the situation in which businesses would have no other choice but to use their own cash holdings in order to survive during a recession.