"Growing Fears of Corporate Defaults Hit US Credit Markets"

Ladies and gentlemen, buckle up! The credit market is in for a wild ride as the probability of U.S. corporate defaults has more than doubled in the past several years. According to a new report from Moody’s asset management research team, the one-year forward-looking probability of a U.S. publicly traded company defaulting reached a staggering 9.2% at the end of 2024. This is a red alert for investors, and you need to pay attention!

The culprit? Persistently high interest rates. Despite strong economic growth, labor market strength, and tight credit spreads, these rates are straining the credit quality of U.S. companies. David Hamilton, managing director at Moody’s and head of asset management research, warns that the current narrative of solid corporate credit is a mistake. He says, “If you were seeking to raise debt capital, there are a wealth of options out there now, whether it’s bonds, loans, private credit, you name it.” But here’s the kicker: you need to look at this through multiple lenses.

High-yield companies are significantly outperforming, with an average probability of default at 3.3% at the end of 2024. But middle-market companies, predominantly loan-financed, are in a world of hurt with a default risk of 7.6%. Why the difference? Sensitivity to rates and access to capital. High-yield bond issuers who locked in rates during the post-pandemic refinance boom are largely insulated. Smaller companies paying floating rates and unable to tap large bond issues are stuck and vulnerable.

So, what’s the play here? You need to diversify your debt capital sources. Bonds, loans, private credit—spread your bets. And if you’re a company, lock in those rates when they’re low. Strengthen your financial health and reduce leverage. This is a no-brainer!

Now, let’s talk private credit. It’s emerging as an investment-grade strategy, touting strong underwriting. But beware, the illiquidity concerns are real. Private credit funds aim for a BAA-type rating, but the illiquidity can be a significant risk, especially in times of market stress. The average probability of default for 47 business development companies (BDCs) was tracked at 0.34% at the end of 2024, while the average Baa-rated probability of default was 0.26%. Close, but not a perfect match.

The bottom line? The credit market is in turmoil, and you need to act now. Diversify your portfolio, stay vigilant, and don’t get caught in the default trap. This is a market that hates uncertainty, and you need to be ready for anything. So, buckle up and get ready for the ride of your life!