Default, Transition, and Recovery: U.S. Speculative-Grade Corporate Default Rate To Fall Further To 3.25% By September 2025

Uncertainties don't automatically result in increased defaults, but there is arguably a higher vulnerability with the current population given its still weak rating distribution since 2020 (see chart 2). Although we are calling for a falling default rate in our base case, we maintain the 5.25% downside possibility in light of these sensitivities. This year has been marked by a strong rebound in issuance and a historic tightening in spreads. Firms took advantage of this to reduce near-term refinancing needs, pushing upcoming totals down through at least 2028 (see chart 3). After two years of lackluster issuance, the over 60% increase in 2024 so far has been a welcome reprieve for many issuers who were able to address near-term liquidity

...- Falling rates, falling inflation, and lower upcoming maturities alongside a still-resilient economy and earnings growth lead us to forecast a lower default rate ahead: 3.25% through September 2025, from 4.4% as of this September. - With policy rates declining, loan issuers are positioned to see their borrowing costs fall, but newer fixed-rate debt issued this year will carry higher coupons, potentially straining some issuers. - We believe there is increased likelihood for more tariffs in the future, with the potential for subsequent inflation and a slower pace of rate cuts. However, default risk is relatively contained for now given that a high percentage of weaker issuers within service industries, which are less exposed to trade. - However, changes to immigration policies--and subsequent uncertainties for labor--could affect some service sectors. With so much unknown regarding future policies, combined with a still historically weak rating distribution, our pessimistic case calls for...

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