US speculative-grade default rate may rise in 2022 to 3% – S&P Global Ratings

The U.S. speculative-grade corporate default rate could double in 2022 to 3.0% from 1.5% at Dec. 31, 2021, S&P Global Ratings said in a report published Feb. 16 (speculative-grade ratings are BB+ and lower). The 3.0% projected base case default rate is up from the agency's 2.5% base case projection in 2021's back half.

In its latest report, Ratings also raised its "optimistic" and "pessimistic" case U.S. speculative-grade corporate default rate projections. The optimistic case default rate was lifted to 1.75% from 1.5%, while the pessimistic case expectation was increased to 6.0% from 5.5%.

Ratings' report pointed out that "near-term indicators suggest a low default rate ahead, however, stressors are growing," such as persistent inflation, rising interest rates and a weakening equity market among those listed. Noting that the base case is below the long-term default rate average of 4%, the report added that "it is more likely any noticeable increase in defaults may occur in 2023 if these stressors continue or worsen."

Ratings expects that even in its optimistic scenario, defaults will rise off the current 1.5% level. Ratings said "our base case acknowledges more stress in the system relative to a quarter ago," while the pessimistic scenario could become reality if, among other things, the Fed tightens more aggressively than expected, companies have difficulty passing through higher costs or equities weaken further, harming financing conditions.

While policymakers are attempting to avoid a wage-price spiral, "moving haphazardly risks harming consumer spending," Ratings said. The consumer is integral to companies in the media/entertainment and consumer products sectors, which make up 41% of C-category issuers, those which the agency considers at highest risk of default.

Ratings' report went on to say that "our ratings distribution remains weak among speculative-grade firms," with about 35% of speculative-grade ratings at B- or lower. A combination of declining risk appetite and weakening lending conditions "could eventually strain some low-rated issuers."