Credit Benchmark says funding conditions expected to ease in most sectors in H2
Leveraged loans have highest projected default rate
‘We think the really heavy damage has already happened’
January 24, 2024 (Preqin News) – Credit default risk in the US is set to peak by mid-2024 before beginning to decline in most sectors, according to a new report by ratings and analytics company Credit Benchmark.
The default risk outlook for US industries is largely tied to inflation expectations, with anticipated US Federal Reserve (Fed) rate cuts factored into the Credit Benchmark analysis. External geopolitical risks and economic malaise could still pose significant challenges to creditworthiness, according to the firm’s 2024 Default Risk Outlook report.
Leveraged loans have the highest projected default rates of the 13 sectors analyzed in the report, and the sector is not expected to reach its turning point until the end of 2024 or 2025.
However, issuer sentiment is much improved from a year ago, the report’s author, David Carruthers, Research Adviser at Credit Benchmark, said.
‘There was a lot of nervousness at issuers and regulators at the beginning of 2023 about leveraged loans,’ he told Preqin News. ‘But a lot of the haircuts have now been taken. While it could get a little bit worse for investors before it gets better, we think the really heavy damage has already happened.’
Credit Benchmark used over 100,000 Credit Consensus Ratings (CCRs) from internal risk analysis at banks to run nearly 60 simulations to project default rates. The estimated observed default rate (ODR) on leveraged loans rose from around 3.2% at the end of 2019 to 4.9% in December 2023. Credit Benchmark said a rise in default rates to 4.9–5.3% in 2024 was the ‘most likely’ outcome.
The credit outlook for US pharmaceuticals throughout 2024 is largely positive, with the long-term projection skewed towards lower risk. Secular trends in 2023, including the use of AI and new drug discovery, have contributed to an improving credit default rate.
The oil and gas sector is expected to see the most improvement in 2024, with more firms moving into investment-grade territory, and a projected fall in the default rate from 1.0% to 0.7%. However, the sector remains vulnerable to external influences, including the ongoing conflicts in Ukraine and the Middle East.
Credit default risk in the technology sector in the US is projected to slightly rise in 2024, from the current high of 2.4% to a rate of 2.5–2.7%, but will peak this year. Telecoms will also suffer, with a projected median default rate of 4.4%, and a pessimistic outlook projecting it may rise as high as 6.4%.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.