As companies grapple with refinancing their debt at higher interest rates, defaults on high-yield debt are likely heading higher, Fitch Ratings reports.
The rating agency reported that the high-yield default rate rose to 2.8% in July from 2.6% in June, and it projects the rate to continue rising through the end of the year.
“We expect [high yield] defaults to trend higher over the remainder of the year, ending 2023 within a range of 4.5%-5.0%, due to higher burden of interest expense, tighter lending conditions and more limited capital access resulting from stress in the banking sector and inflation uncertainty,” Fitch said in its report.
The increased interest costs will continue to pressure cash flows and companies’ financial flexibility, “posing an outsized risk for issuers already constrained by the macroeconomic operating environment,” it said.
The rating agency’s list of bonds at risk of default edged up to US$53.7 billion in August, up from US$53 billion in July. The total has doubled from US$26.4 billion at this time last year.
The primary sectors on the list are the health-care and pharmaceutical sector at 33%, telecoms at 23% and retail at 14%.