Key Takeaways
- A global rate-cutting cycle has begun, but the pace and timing of future cuts are still highly uncertain. Rates remain at decade-high levels, pressuring some issuers--particularly those with floating-rate debt instruments.
- Additionally, primary issuance of floating-rate debt remains strong, and if the descent of interest rates disappoints, it could place increasing pressure on these issuers.
- Issuers with floating-rate instruments tend to be lower rated. Year to date, 62% of instruments associated with North American defaulters have been floating rate, with most of those defaults occurring via a distressed exchange.
- Just over three-quarters of current weakest links have at least one floating-rate instrument. Unhedged, lower-rated floating-rate borrowers remain particularly vulnerable to the timing and extent of future rate cuts.
A global rate-cutting cycle may be underway, but for now, interest rates remain near decade-high levels, and the pace and timing of future cuts remain uncertain (see chart 1). Additionally, primary markets for new floating-rate debt remain robust, and if the descent of rates disappoints, it could increasingly strain issuers' ability to repay their debt.
In our view, it's likely that the prevalence of floating-rate debt instruments among lower-rated issuers is playing some role in the current increase in distressed exchanges. Of the issuers that have defaulted year to date (through July), 81% had at least one floating-rate debt instrument. And of those year-to-date defaulters with floating-rate debt, 62% defaulted via a distressed exchange. (While S&P Global Ratings assigns its 'SD' rating to issuers engaging in a distressed exchange, it doesn't necessarily mean that the exchanged debt was floating rate.)
In addition, we believe lower-rated floating-rate borrowers remain particularly vulnerable to the timing and extent of future rate cuts--which could potentially delay a gradual decline in default rates. Indeed, 76% of the issuers that we currently classify as weakest links--issuers rated 'B-' or lower with negative outlooks or ratings on CreditWatch with negative implications--have at least one floating-rate debt instrument.
And while some issuers may have hedged for at least part of the duration of their issues, the cost of refinancing still remains high for lower-rated issuers. The median coupon on bonds rated 'B-' or lower that were issued in 2024 is roughly 8.75%, and $80 billion in debt rated 'B-' or lower will come due over the next two years (see chart 2).
We don't know how much of the total debt of individual issuers is floating rate, and thus whether the presence of floating-rate debt was the ultimate reason for a default. We also acknowledge that there are many factors that contribute to defaults, and the cost of financing is only one.
However, we do note that lower-rated issuers tend to have more floating-rate debt than investment-grade issuers, and they also tend to face more operating and financing cost pressures than investment-grade issuers.
For more information, see the Data Approach section at the end of this report.
Chart 1
Chart 2
Floating-Rate Debt, By Region And By Sector
Floating-rate debt accounted for 59% of the $103.9 billion that this year's defaulted issuers had in total debt outstanding as of July.
- Defaulted North American issuers were the largest contributor to this floating-rate debt--unsurprising since the region has the highest number of defaults, both by number and debt amount. About 62% of instruments are classified as floating rate (see chart 3).
- The split for defaulted issuers in Europe was more tilted toward fixed-rate debt. Only 26% of the amount outstanding from defaulted instruments was floating rate.
Chart 3
The top six sectors accounted for 91% of the total outstanding debt of defaulted issuers year to date. Of the defaulted issuers in these six sectors, the defaulted issuers in the health care sector had the greatest share of floating-rate debt, at 91% (amounting to $15 billion).
Many of these defaults were of leveraged health care service providers, which continue to struggle with margins and cash flows amid high labor costs and elevated interest expenses (see "Industry Credit Outlook Update North America: Health Care," published July 18, 2024).
Nearly one-third of the outstanding debt of issuers that have defaulted year to date was in the telecommunications sector--which was the sector with the greatest amount of this debt that was floating rate (see chart 4). Many telecom companies did take advantage of lower interest rates in 2020 and 2021, but because issuers in the 'B' rating category had limited access to public debt markets, many relied instead on bank loans with floating rates.
Cash flow deficits have worsened in the telecom sector amid the high interest rates of more recent years, straining companies' capital structures and increasing defaults among the floating-rate issuers. The companies in this sector that are facing upcoming maturities or significant floating-rate exposure may endure a prolonged period of weaker cash flow metrics (see "High Interest Rates And Massive Debt Burdens Will Pressure U.S. Telecom And Cable Speculative-Grade Ratings In 2024," published Feb. 26, 2024, and "Industry Credit Outlook Update North America: Telecommunications," published July 18, 2024).
Chart 4
Looking Ahead: The Issuers Most At Risk Of Default
In general, weakest links are roughly eight times more likely to default than the broader speculative-grade population, meaning the number of weakest links can be a key indicator of future default risk. While the number of weakest links has decreased in recent months, 76% of weakest links have at least one floating-rate debt instrument (all together, that floating-rate debt amounts to $255 billion, which is 57% of the total debt outstanding).
The real risk to this vulnerable population is, if the descent in interest rates disappoints, it could leave them at a higher risk of not being able to meet their debt obligations if they haven't hedged adequately.
North America has the highest percentage of weakest links with floating-rate debt, at 60%; that floating-rate debt, all told, amounts to $237 billion (see chart 5). Collectively, Europe's weakest links have proportionally less floating-rate debt outstanding, with only $17.3 billion, and only 35% of weakest links have floating-rate debt.
The fact that floating-rate debt is more prevalent at North American weakest links than at European weakest links has to do with differences between those two rated weakest links universes, as well as regional weakness in sectors with high debt levels.
While both North America and Europe have seen a decline in the number of weakest links, most of the removals were due to defaults, not upward ratings momentum.
Chart 5
Even though the global health care sector has seen an elevated number of defaults so far in 2024, it still has the highest volume of debt outstanding--and 60% (or $59 billion) of that debt outstanding is in floating-rate instruments (see chart 6). We expect the trend of historically high numbers of defaults to continue in the health care sector since highly leveraged companies in that sector are struggling to generate sustainable free operating cash flow given the current inflationary environment.
Excluding sectors with low amounts of debt outstanding, the consumer products sector had the highest proportion of weakest link floating-rate debt, with 86%. The high technology and capital goods sectors each followed, with 79%.
Chart 6
Data Approach
Default data in this publication is as of July 31, 2024. Outstanding debt refers to all issuer debt outstanding from the defaulted entity, not just defaulted debt outstanding.
The weakest link population is also as of July 31, 2024.
Data on splits between floating-rate debt and fixed-rate debt was taken at the parent organization level. Instrument-level data was retrieved from the underlying data used in "Global Refinancing Update Q3 2024: Near-Term Risk Eases," published July 29, 2024. For 15 of the weakest links, instrument-level data was unavailable.
Related Research
- Global Refinancing Update Q3 2024: Near-Term Risk Eases, July 29, 2024
This report does not constitute a rating action.
| Credit Research & Insights: | Nicole Serino, New York + 1 (212) 438 1396; nicole.serino@spglobal.com |
| Erik Wisentaner, London; erik.wisentaner@spglobal.com | |
| Patrick Drury Byrne, Dublin (00353) 1 568 0605; patrick.drurybyrne@spglobal.com |
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