(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings])
This report does not constitute a rating action.
Key Takeaways
- Recent increases in market volatility related to tariffs have raised fears for growth and higher default rates.
- We have mentioned this as a potential factor in our corporate default projections since November 2024 and included tariff-related stress in our pessimistic scenarios for the U.S. and Europe.
- A large portion of speculative-grade issuers in the U.S. and Europe are from service-based sectors, limiting their initial exposure to tariffs on goods. Threats to overall consumer spending and the macro economy are larger, if more indirect, issues for defaults ahead.
- For now, we are maintaining our base-case projections for 2025, including a 3.50% speculative-grade corporate default rate in the U.S. and 3.75% in Europe. However, the longer tariff uncertainty lasts, or if it worsens, the greater the likelihood defaults increase, moving toward our pessimistic cases (rates of 6.00% and 6.25%, respectively).
Volatility Increased In April But Remains Contained
Market volatility has increased globally across essentially all major asset classes (equities, fixed income, currencies, and derivatives), with repercussions for speculative-grade issuers. Corporate spreads increased quickly this month after the new and extensive round of tariffs announced by the U.S. on April 2, then again after China instituted counter tariffs. However, the increase is still relatively modest for the U.S. and Europe compared with historical episodes of rapid spread widening (see chart 1).
Chart 1
That said, primary markets became essentially closed to speculative-grade issuers globally after the U.S.'s tariff announcement on April 2. In fact, there were no new high-yield deals between April 2-14, the longest such stretch since August 2024. This disruption to issuance is similar to the recent widening of spreads in that it remains very modest compared with prior examples, including the late-2018 drop in high-yield issuance, which spanned approximately two months. That dry spell was also largely in response to a deteriorating tariff outlook between the U.S. and China at the time.
The Direct Near-Term Impact Of Tariffs May Be Somewhat Limited
The current pause on higher tariffs by the U.S. for countries except China might offer a brief reprieve for U.S. importers, and the current 10% rate may not prove a huge burden to European exporters. Clearly the tariff situation is a headwind for issuers and consumers, but we think the direct effects on U.S. and European default rates may be relatively modest through year-end 2025.
This is because the weakest issuers in the U.S. (those rated 'CCC+' or lower) are heavily concentrated in service-based industries, at about 46% by our estimates. These companies have somewhat limited direct exposure to the impact of tariffs on China and resulting increases in input prices (or lack of inputs reaching them). Furthermore, the duration and level of tariffs will also matter--the longer higher-rate tariffs are in place, the greater their effects on defaults going forward.
The potential impact of increased tariffs varies by sector, as does the perceived ability of sectors to pass on increased costs to consumers. Not all sectors can pass on the majority of their increased costs, while others might. Moreover, if tariffs make intermediate goods and inventories prohibitively expensive, there may not be more expensive end goods to pass on in the first place.
The larger threat that could spark a higher default rate by year-end 2025 is the ultimate effect on consumer spending in the U.S. and Europe. We perceive a slightly different environment in each region, with relatively stronger consumer confidence in Europe, versus rapidly falling sentiment indicators in the U.S. The years of enjoying excess savings from government support in response to the COVID-19 pandemic are now over, while interest rates have increased materially, particularly on credit cards, which U.S. consumers recently started using more.
Near-Term Refinancing Obligations Are Lower Than Early 2024
Strong bond and loan issuance in 2024 helped reduce the upcoming amount of maturing debt for U.S. and European speculative-grade firms at the start of 2025 (see charts 2-3). All else being equal, lower amounts of debt may ease some of the hit from more volatile primary markets this year. However, higher volatility will likely reduce more growth-oriented transactions such as those used to fund mergers and acquisitions or capital expenditure this year.
The difference 2024 issuance made is clearer in the U.S.--which has roughly $80 billion less in upcoming maturities over the next three years, relative to the start of 2024. In Europe, the maturing debt totals increased over the following two years (2025 and 2026), but the third-year total declined to a greater extent, reducing the overall debt pile due in our three-year window. We also downgraded some large issuers in Europe to speculative grade in 2024, which increased the totals for the following two years, but they remain in the 'BB' category and therefore less likely to default than lower-rated peers.
Chart 2
Chart 3
The Path Forward Remains Unclear
The deteriorating tariff situation is a growing threat for markets and economies globally (see "Global Credit Conditions Special Update: Ongoing Reshuffling," published April 11, 2025). The U.S.'s 90-day pause on most of the April 2 tariffs has offered hope for markets, which have rebounded somewhat in the past week, but the optimism is day-to-day and may ultimately prove fleeting. This is because there is a general lack of clarity on the course ahead.
For now, the impact on credit has been minimal--we have observed three defaults globally this month through April 16 and falling default rates through March. We estimate the U.S. speculative-grade default rate reached 4.6% by March 31, 2025, from 5.1% at year-end 2024, with Europe’s rate declining to 4.1% from 4.5%. Moreover, our speculative-grade negative bias--the proportion of issuers with a negative outlook or ratings on CreditWatch negative, remained historically low and stable through mid-April (see chart 4). This could change in the days and weeks that follow as the effects of new tariffs on business operations become clearer, or if access remains limited in primary markets for a long period, restricting refinancing opportunities.
Speculative-grade corporate issuers tend to be dominated by larger firms, which may not reflect the full corporate universes in many regions.
Chart 4
If the current pause proves fleeting and the situation deteriorates further (or lasts longer), we expect defaults to increase, which could push default rates up toward our existing pessimistic cases, with the possibility for higher default rates as 2026 unfolds.
Related Research
- Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
- The European Speculative-Grade Default Rate Could Level Out At 3.75% By December 2025, Feb. 21, 2025
- The U.S. Speculative-Grade Corporate Default Rate Could Fall To 3.5% By December 2025, Feb. 20, 2025
| Primary Contact: | Nick W Kraemer FRM, Credit Research & Insights, New York 1-212-438-1698; nick.kraemer@spglobal.com |
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