Morgan Stanley: The corporate default rate will hit a new high in 2024
JP Morgan's report shows that the repeat default rate for high-risk companies in 2024 has reached a record high, with about 35% of defaults being recidivism. The leveraged loan default rate has hit a four-year high, impacted by high interest rates, and the balance sheets of low-rated companies are deteriorating. Despite the Federal Reserve's interest rate cuts, the default rate in the loan market remains higher than that in the high-yield bond market, with the gap being the largest in 24 years. The report indicates that 70% of defaults are caused by bad trades, and borrowers may default again, leading to reduced returns for investors
According to Zhitong Finance, a new report from JP Morgan shows that high-risk companies are experiencing record levels of repeat defaults in 2024. The report, authored by strategist Nelson Jantzen, states that approximately 35% of defaults and distressed transactions this year are repeat defaults. Meanwhile, the default rate on leveraged loans is at its highest level in four years.
For most of last year, interest rates remained high, weakening the balance sheets of lower-rated companies. This impact is particularly evident in the leveraged loan market, as these issuers borrow based on floating rates, and when the Federal Reserve raises interest rates, some issuers see their interest costs nearly double. Although the Federal Reserve cut rates three times last year, it indicated that it would slow the pace of rate cuts in 2025.
Compared to the high-yield bond market, the proportion of lower-rated bond issuers in the loan market is also higher, as private equity firms increasingly utilize this asset class during periods of near-zero interest rates. The report states that this means the default rate in the loan market far exceeds that of the high-yield bond market, with the gap reaching the highest level in 24 years. By the end of the year, the partial weighted default rate for U.S. high-yield bonds was 1.47%, while the same metric for loans was 4.49%.
Highly leveraged loan issuers are increasingly adopting so-called liability management measures to reshape their capital structures, often in the face of upcoming maturities or cash shortages. The report states that a record 70% of defaults and transaction volumes in 2024 are caused by bad trades. However, these types of trades do not always cut enough debt to turn the business profitable, and borrowers may ultimately default again, leading to lower returns for investors