US healthcare sector's default risk jumps, most others fall during Q3

The odds of default for publicly traded US healthcare companies rose during the third quarter even as risk mostly receded in other sectors, according to S&P Global Market Intelligence data.

Healthcare remained at the top of the list of the most vulnerable sectors at the end of the third quarter, climbing from a revised 4.6% median probability of default score at the end of the second quarter to 5.6%. The scores, which represent the odds of default within a year, are based primarily on the volatility of share prices for public companies and account for country- and industry-related risks.

The only other sector to see its default risk increase was utilities, which saw its median market signal one-year probability of default score tick up by a single basis point to 0.3%.

US stocks were hit by a surge in bond yields in the third quarter, as the Federal Reserve indicated it would likely keep interest rates higher for longer than previously expected amid persistent inflation. The S&P 500 ended the quarter down 2.5% from the close of the second quarter, though it has risen 11.4% through the first nine months of 2023.

Expectations of equity market volatility — as reflected by the market "fear gauge" CBOE Volatility Index — ended the quarter higher than three months earlier, but the index was still well below its most recent peak in October 2022.

Most, least vulnerable

The drug retail industry recorded the highest probability of default score across all US industries at the end of the third quarter, according to Market Intelligence data. At 15.4%, its score was notably higher than at the end of the second quarter, when it stood at 10.8%.

Several other industries operating within the healthcare space were among the most vulnerable, including healthcare technology and equipment companies, as well as providers of healthcare facilities and services. Median probability of default scores for those industries ranged from 6.2% to 9.5%.

The least vulnerable US industry was asset management and custody banks, with a median probability of default score of 0.01%.

Biggest increases, decreases

Healthcare-adjacent industries dominated the ranks of industries with the largest rise in default risk, with drug retail's score increasing by 4.6% from the end of the second quarter to 15.4% at the end of the third quarter. The risk of default for facilities, equipment and technology companies in the healthcare sector grew to 6.2%, 8% and 9.5% over the last quarter, respectively.

The odds of default for healthcare distributors dropped to 3.2%, with commercial printing a distant second with a decline to 5.0% during the quarter.