The high-yield default rate stayed flat in May, but it’s expected to rise in the second half, driven by tougher financial conditions, says Fitch Ratings.
In a new report, the rating agency said the trailing 12-month default rate for U.S. high-yield bonds remained at 1.9% last month, unchanged from April.
However, it projects the rate to rise and finish the year in a range of 4.5% to 5.0%.
Defaults are expected to rise for a number of reasons, including increased interest expenses, tighter lending conditions and reduced access to capital stemming from “stress in the banking sector and inflation uncertainty.”
Fitch’s list of the most at-risk bonds has “declined modestly to US$52.7 billion in June from US$53.3 billion in May,” as bankruptcy filings have outpaced additions to the list.
“Still, the list is up sharply from US$17.3 billion in June 2022, underscoring the deteriorating environment over the last year,” it said.
The increase in at-risk bonds over the past year “reflects the growing number of issuers facing liquidity pressures” and the expected increase in issuers that undertake debt restructurings that will be considered defaults, it said.
By sector, the health-care/pharmaceutical industry represents the largest share of the list, at just over one-third of the total (34%), followed by the retail and telecom sectors at 14% and 13%, respectively.