A recent analysis by S&P Global Ratings has highlighted that the proportion of companies defaulting on their financial obligations more than once has escalated, reaching its second-highest point since 2008. This uptick in "re-defaults" is contributing to diminished recovery rates for investors, a situation exacerbated by an increase in issuers rated B- or lower, indicating substantial debt levels.
The report points out that these issuers had initially structured their capital during periods of lower interest rates, expecting such favorable conditions to persist. However, the landscape has shifted, with consumer inflation rates exceeding forecasts and reducing the likelihood of rate reductions by the Federal Reserve within the current year. This scenario, described as a "higher-for-longer" interest rate environment, poses significant challenges for highly leveraged entities, particularly those with a history of defaulting.
Distressed exchanges are becoming a more common strategy among borrowers seeking to mitigate creditor losses and stave off bankruptcy. These arrangements, however, are often seen as a temporary solution, allowing issuers a brief period to stabilize. S&P categorizes these as "selective defaults," with a considerable portion of these borrowers being downgraded to CCC+, indicating a heightened risk of subsequent defaults.
The analysis further reveals that repeated defaults lead to more substantial losses for investors, particularly affecting senior unsecured bonds, where recovery rates have plummeted from approximately 60% to 40%. This trend underscores the compounded risk faced by investors in entities that have defaulted multiple times.
As of the end of March, the U.S. speculative-grade default rate stood at 4.8%, based on S&P's tracking of issuer defaults over the past twelve months. This figure underscores the ongoing challenges within the credit market, highlighting the precarious position of highly leveraged companies in a shifting economic landscape.
