After defaults rose by 80% in 2023, we continued to see an elevated number of defaults to date in 2024, rising at their fastest pace since 2008. But a less obvious underlying trend is the rise in the number of issuers not defaulting for the first time. The increase in defaults and repeat defaults is, to some extent, driven by more entities becoming comfortable with high levels of leverage in their capital structure, many of which were set up during (and in anticipation of sustained) low rates.

This is reflected by the material increase in the number of weaker issuers, namely the 'B- ' and below rating population, which has increased to 24% of speculative-grade ratings as of December 2023, from only 14% as of December 2008. A higher number of weaker rated issuers has consequently led to an overall higher number of defaults, and a higher number of 're-defaulters'-- companies that have previously defaulted at least once. The rise of re-defaulters is indictive of issuer specific factors rather than macro-economic factors and this FAQ seeks to address questions around the topic.

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Frequently Asked Questions

What percentage of 2023 defaults were issuers that have previously defaulted? How does this compare with previous years?

In 2023, 35% of total global defaults were by issuers who had at least one previous default-the second highest percentage since 2008. So although we experienced an elevated number of defaults in 2023, many of those issuer's defaulting were doing so for a second, third, fourth or even fifth time. Additionally, more than half of these issuers were re rated again following their 2023 default. This means that issuers were able to reemerge post default and are currently re-rated, the majority of which are re- rated in the 'B-' and below rating category. Issuers below 'B-' typically have higher business and financial risk profiles, and if market or credit fundamentals remain challenging, some of these issuers may need to restructure either part or their entire capital structures again, subsequently leading to an additional default.

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Is there a meaningful connection between the percentage of selective defaults and re-defaults?

Over time, more issuers that selectively default ('SD') are re-rated within 12 months of defaulting, compared with those that go through a default ('D'). A 'SD' rating differs from a 'D' rating in that an issuer may have only defaulted on one or a portion of its debt obligations, whereas a 'D' rating is a general payment default across the capital structure or when an entity files for bankruptcy. In the case of an 'SD' rating, an issuer conducts a distressed exchange, which we have found often only provides a temporary reprieve to issuers in regaining their footing and starving off a more comprehensive (and costly) bankruptcy. Since 2008, 68% of 'SD's' are re-rated within 12-months of defaulting compared with only 16% of 'D's. As a large majority of these issuers are re-rated within the 'CCC+' and below rating category (66%), they are typically highly leveraged and vulnerable to external shocks and thus, have a higher probability of defaulting again.

Additionally, we have found that for issuers that default and eventually are re-rated, those that selective defaults stayed in 'SD' for an average of 66 days, compared with those that defaults ('D') and stay in 'D' for an average of 433 days. Not only are more selective defaults being rated again, but the time in default is far less.

Do recovery rates differ following a repeat default?

We find that average recoveries for defaulted debt instruments tend to be lower following a re-default than following an initial default. We looked at ultimate recovery data (using data from LossStats in S&P Global Market Intelligence CreditPro) following 157 defaults from 80 repeat defaulters. This sample was taken from U.S.-based companies that emerged from default between 2001 and 2023.

While recoveries fell after subsequent defaults across the debt structure, the drop-off was less pronounced among more senior instruments. For instance, term loan recoveries averaged 71% following an initial default, but were seven percentage points lower after subsequent defaults (at 64%). Senior unsecured bonds had a steeper decline in average recoveries, falling from 63% after an initial default to 37.6% after subsequent defaults.

In these cases, the restructuring after the initial default may not have sufficiently addressed the company's secular or operational challenges, leaving it on unsteady footing. Consequential follow-on defaults and restructurings may have been necessary to fully address the challenges, and these would likely result in lower valuations and recoveries.

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Which sectors in 2023 were most prone to the risk of repeat defaulters?

By sector, the consumer services sector led in 2023 with the highest percentage of repeat defaulters--more than 64% of total sector defaults--higher than its five-year average of just over 30%. The high technology sector also had a much higher percentage of repeat defaulters in 2023, with 50% of total sector defaults.

Conversely, the four defaults from the energy sector in 2023 were all by issuers with no prior defaults. The energy sector typically has a much higher percentage of repeat defaults (at 41% of total defaults), but, since 2015 many producers and refiners have been acquired, completely dissolved, or have used the past two years of strong prices and margins to deleverage and avoid an additional default (see "Industry Credit Outlook 2024: Oil and Gas", Jan. 9, 2024).

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Is there one region where we typically see more repeat defaulters?

While we know macroeconomic, cyclical credit, and company specific factors clearly drive repeated defaults, we have observed some regional differences. The percentage of re-defaulters (the number of re-defaulters divided by the total 'B-' and below population) in both North America and Europe are currently higher than their five-year and 10-year averages, with Europe being significantly higher at more than 50% above its 10-year average. For both the U.S. and Europe, this is likely caused by an uptick in overall defaults in the regions, including a higher percentage of distressed exchanges, and thus a higher number of issuers with previous defaults rated in the 'B-' and lower rating categories.

In the emerging markets region, the percentage of re-defaulters at 20.9% is currently significantly higher than both North American and European regions at 14.4% and 12.0%, respectively. However, when we dissect this further, we observed that the region currently has a lower number of issuers rated 'B-' and below--hence a materially lower denominator--rather than an elevated number of re-defaulters. In fact, emerging markets is the only region where the number of repeat defaults is currently lower than both its five-year and 10-year averages.

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What does our current list of rated issuers with previous defaults tell us about the potential for defaults ahead?

In 2023, more than 70% of issuers rated 'B-' or below that have previously defaulted, have defaulted once. However, there are 10 issuers which have already defaulted three times and three issuers that have previously defaulted five times. All have selectively defaulted (most of which are distressed exchanges), meaning they have exchanged part of their capital structure to improve their liability structure or liquidity by offering creditors less than what was originally promised.

Additionally, the highest percentage (40%) of these issuers are currently rated 'CCC+' and below, putting them at a higher risk of default in the medium term considering that their financial commitments may be unsustainable in the long term. Although most of the issuers in this rating category have only previously defaulted once, there is a higher percentage of issuers with two, three, and five defaults than the 'B-' rating category. We have observed that the more times an issuer defaults, the more likely they will default again. With each subsequent default, the time to default decreases (see "A Rise In Selective Defaults Presents A Slippery Slope, June 26, 2023").

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So, what are our views if we have an increase in issuers with previous defaults?

We have observed that issuers with previous defaults tend to default at a higher rate than the overall speculative-grade population. To better understand the relationship between default rates and the default rates of issuers with previous defaults, we created a 12-month trailing repeat defaulters' default rate. This default rate looks at the number of issuers that have defaulted and had previous defaults over a 12-month period and divides that by the total number of issuers who had at least one prior default, and were re-rated having a valid outstanding rating at the start of the pool.

We noticed that the previous default rate tracks almost exactly with the overall speculative-grade default rate. However, the rate at which issuers with more than one default are defaulting is much higher. The global 12-month trailing speculative-grade default rate is 3.7% as of December 2023, compared with the global 12-month trialing default rate of issuers with a previous default at 15.1%. This indicates that issuers with previous defaults are more susceptible to default again during times of higher default rates, than the general speculative-grade population.

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