Key Takeaways
- We expect the global speculative-grade corporate default rate to fall to 3.5% through September 2025, from 4% as of September 2024.
- Our projection is based on various default forecasts, showing declines in some regions and increases in others.
- To date, this global default cycle has been characterized by one of the highest proportions (roughly 58%) of distressed exchanges, which carry higher recovery rates but can be a prelude to additional defaults by these issuers; observations likely to continue into 2025.
- Key risks to our baseline projection include stubborn inflation, with the potential for higher interest rates, or any unexpected deterioration in regional demand, which is already under strain from rising delinquencies in the U.S., persistent inflation perceptions in Europe, and flagging confidence in China.
S&P Global Ratings Credit Research & Insights expects the global trailing-12-month speculative-grade corporate default rate to fall slightly to 3.5% by September 2025 from 4.0% in September 2024 (see chart 1). This forecast incorporates declining default rates in the U.S. and Europe, alongside a slight rise in Asia-Pacific (APAC). In the post-pandemic period, APAC's default rate has mostly moved in the opposite direction to other regions--rising during 2021's spate of defaults among Chinese homebuilders but falling since year-end 2022. Interest rates are expected to decline in the U.S. and Europe, although at a slower pace than they've increased, while APAC could experience more case-specific drivers than any macro-credit influenced trend. U.S. loan issuers, which comprise most debt rated 'B' and 'B-', have secured lower spreads on their floating-rate debt in 2024, enabling lower financing costs as interest rates decline in 2025. U.S. growth has been exceptionally resilient with a soft-landing anticipated for the economy next year, while Europe's growth is expected to accelerate after two rather lackluster years. In contrast, APAC may be challenged by China's recent slowdown.
Chart 1
Threats to our global baseline forecast include:
- Stubborn inflation, possibly later in 2025 if substantive trade restrictions take effect.
- Resultant higher policy rates from central banks, relative to current market expectations.
- A marked decline in consumer spending globally amid rising delinquencies in the U.S., elevated inflation perceptions in Europe, and falling confidence in China.
Default rates have been elevated in developed markets this year when compared historically, largely due to the increased use of distressed exchanges (see chart 2). This has been particularly the case in Europe, which has seen nearly seven in 10 defaults driven by these events. Conversely, they account for less than half of defaults in APAC.
Chart 2
While default rates have breached long-term averages in the largest regions (the U.S. and Europe), distressed exchanges and other selective defaults tend to be less punitive in terms of loss rates, limiting their full economic costs (see "U.S. Recovery Study: Loan Recoveries Persist Below Their Trend," published Dec. 15, 2023, on RatingsDirect). That said, many distressed exchanges do result in repeat defaults within somewhat brief periods, often only offering short-term relief (see "The Rise of Repeat Defaulters," published April 11, 2024). These issuers regularly re-emerge from distressed exchanges into the 'CCC/CC' category, meaning repeat defaults tend to come from those issuers with lower ratings. This year's default rates also highlight the increased usage of distressed exchanges in Europe (see charts 3 and 4). For example, the 2024 year-to-date (10-month) default rate for the 'CCC/C' category is over 10% higher in the region than the long-term annual rate.
Chart 3
Chart 4
Higher default rates among issuers in the lowest rating category have driven up overall speculative-grade default rates for the U.S. and Europe in 2024. This is partially because the proportions of 'CCC/C' ratings in the total speculative-grade populations are now much higher in these regions after the COVID-19 pandemic--11.4% in the U.S., and 9.1% in Europe, versus 5.6% in the rest of the world.
In addition to (and contributing to) the higher proportion of 'CCC/C' ratings are repeat defaulters, which account for larger percentages in the U.S. and Europe as well (see chart 5). Many defaulters in APAC during 2021 were from Chinese homebuilders, which have not re-emerged on new ratings since then. As a general rule, repeat defaulters are less of a going concern in APAC, which helps explain the region's much lower default rate recently--having hit zero for the past three months through October 2024.
Chart 5
Related Research
- The Asia-Pacific Speculative-Grade Default Rate Could Rise To 1.5% By September 2025, Dec. 8, 2024
- Global Credit Outlook 2025: Promise And Peril, Dec. 4, 2024
- Spotlight On U.S. Defaults In October, Nov. 19, 2024
- European Speculative-Grade Default Rate Should Fall To 4.25% By September 2025, Nov. 18, 2024
- U.S. Speculative-Grade Corporate Default Rate To Fall Further To 3.25% By September, Nov. 15, 2024
- Overstated But Overdue: The Current Default Environment In The U.S., Jun 5, 2024
- The Rise of Repeat Defaulters, April 11, 2024
- U.S. Recovery Study: Loan Recoveries Persist Below Their Trend, Dec. 15, 2023
This report does not constitute a rating action.
| Credit Research & Insights: | Nick W Kraemer, FRM, New York + 1 (212) 438 1698; nick.kraemer@spglobal.com |
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