Default, Transition, and Recovery: European Speculative-Grade Default Rate To Stabilize At 3.5% By December 2024

Our expectations for 2024 center on a soft-landing economic scenario supported by wage growth and disinflation. In addition, the speculative-grade bond and loan markets have opened up in recent months, allowing firms to reprice and refinance existing debt. That said, expectations for more growth-oriented uses of debt such as mergers and acquisitions (M&A) and capital expenditures remain muted for now, reflecting a still selective investor environment and restrictive interest rates. Slowing earnings for several quarters in a row leave less room to maneuver amid elevated interest rates. Issuers are dealing with refinancing needs, but at a higher cost. The continuing Russia-Ukraine conflict remains a factor for further uncertainty, which could lead to more acute stress as winter approaches. In addition,

...- We expect the European trailing-12-month speculative-grade corporate default rate to be 3.5% by December 2024, the same level as in December 2023, indicating a relative stabilization of the default rate by year-end after its expected rise to slightly higher levels over the summer. - A prolonged growth slowdown (or recession), particularly if triggered by any meaningful deterioration in regional conflicts spilling over to Europe, could push the default rate higher--to 5% in our pessimistic case. - Higher interest rate burdens still lie ahead for many businesses and households despite recent market optimism and a fall in fixed-rate yields. Upcoming fixed-rate maturities this year and next will force issuers to contend with market rates still roughly 2% higher than those on existing debt. - We think that similar to 2023, consumer-reliant sectors such as consumer products and media and entertainment will likely lead the default tally in 2024. The chemicals and health care sectors may also...

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