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S&P Global Ratings projects 9% speculative-grade default rate by September 2021

S&P Global Ratings Research projects that the trailing-12-month speculative-grade corporate default rate will reach 9% by September 2021, from 6.3% this September, according to a new report.

In a report published Nov. 23, the agency noted that 165 speculative-grade companies would need to default over the forecast period to reach that 9% baseline. Its pessimistic scenario pushes that number to 220, which would equate to a 12% default rate. At best, the rate would be 3.5% by September 2021, on 64 defaults, it said.

For reference, the default rate during the Great Recession peaked at 12.1%, in November 2009, according to Ratings.

The pace of economic growth was stronger than expected in the third quarter, as the Federal Reserve Board's efforts to shore up liquidity helped bring downgrades and negative rating actions down from April's record levels. While S&P Global economists expect the pace of economic growth to slow heading into year-end, they predict a rebound in 2021.

They also note that the wide-open condition on the credit markets in recent months has blunted some of the impact of the downturn. Issuers have inked a record amount of new bonds in 2020, a large percentage of which refinances near-term debt exposures.

According to Ratings, as of Oct. 1, there was $16.1 billion in outstanding debt due in the fourth quarter of 2020 and another $149 billion due in 2021.

"These are small amounts compared with recent issuance totals, indicating any refinancing risk for the year ahead is also quite small," today's report states. "Moreover, roughly half of the speculative-grade debt due in 2021 is within the 'BB' category, which we expect to see muted default activity, if any," analysts added.

S&P Global economists maintain that liquidity is key to containing the fallout from the pandemic, though their current forecast does not account for any impact of the expiring Federal Reserve liquidity facilities at year-end or consider any future government actions that could enable companies to delay or avoid defaulting.

"We feel these programs have had a positive impact on credit market sentiment this year and will be closely monitoring their closure and any noticeable market reactions in the coming weeks," analysts stated in the report.

Liquidity backstops notwithstanding, the agency's 9% baseline for the default rate indicates a perhaps tougher road ahead than many participants were braced to travel. In LCD's most recent survey of risk sentiment among leveraged debt portfolio managers, which was conducted late September, respondents projected a peak for U.S. leveraged loan defaults at 6.6% and a view that the rate would start to come down in the second quarter next year.