Corporate Defaults to Rise and US Will Enter Recession: Survey

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, on March 20, 2023. Brendan McDermid/Reuters

Credit portfolio managers estimate U.S. corporate defaults to rise, according to a recent survey, with the vast majority of respondents expecting the country to slip into recession this year.

In the Credit Outlook survey conducted by the International Association of Credit Portfolio Managers (IACPM), 86 percent of respondents stated that defaults will rise over the next 12 months, while only 14 percent expect the numbers to remain unchanged, stated a press release on April 13.

“Our members have expected to see the impact of rising interest rates for some time, and we’re beginning to see more credit stress and defaults in corporate borrowers now,” said Som-lok Leung, executive director of the IACPM. “Unfortunately, this could take some time to work its way through the system.”

In addition, 84 percent believe the United States will enter a recession sometime this year. Some industries like health care, defense manufacturers, transportation firms like trucking companies, and medium-sized tech firms may be more vulnerable to current market conditions than others.

Commercial real estate could get “particularly vulnerable,” the release stated. “Large numbers of office workers continue to work from home, putting pressure on office occupancy rates, while many property owners will eventually have to refinance in a less accommodating banking environment.”

According to respondents, ongoing challenges to the economy include higher interest rates, geopolitical worries, rising inflation, threat to credit availability caused by reduced bank liquidity, and credit risk concerns.

“Banks, especially regional ones, are not only looking at their deposit bases and whether their depositors will stick around but they’re also hearing from regulators calling for higher levels of liquidity at their institutions,” Leung said.

“In response, banks will do what they have to do to preserve capital and one way to do that is to make fewer loans.”

Corporate Defaults, National Debt Risk

In a November 2022 report, S&P Global Ratings warned that the default rate for American firms could reach 3.75 percent by September 2023 if the Fed’s policy of interest-rate hikes triggers a shallow or mild recession.

In case of a more serious economic downturn, the default rate could even hit 6 percent, which would be the highest level since March 2021.

“Much will depend on the length, breadth, and depth of a recession should one occur, and if the Fed will continue to raise rates through a recession,” the S&P analysts wrote.

“The current pace of widening yields in secondary markets would continue, while consumption would contract, forcing businesses to dig into their cash holdings to ride out a deeper recession.

In a report on April 13, S&P reported 37 global corporate defaults for the first quarter this year, with 14 of them in March alone. This is the highest first-quarter global corporate default tally since 2009.

Almost two-thirds of defaults in March occurred in the United States, where credit conditions “further deteriorated” due to the banking turmoil as well as expectations that the country will fall into a shallow recession, it stated.

Complicating the economic situation of America is the fact that federal debt is at extremely high levels. The government has already hit the $31.4 trillion debt ceiling. Both Republicans and Democrats are negotiating raising the debt limit, but have yet to reach a consensus.

A report by MSCI, an American financial service provider, published in early March warned that the probability of a U.S. debt default had risen by 300 percent since the beginning of 2023.

At the start of January, the probability was only 3.3 percent, which rose to 11.3 percent by the end of February. “Implied default probabilities have increased to levels not seen since the 2013 debt-ceiling debate.”