Fitch Ratings anticipates an uptick in corporate defaults in both the US and the eurozone during 2024, attributing this trend to effects of monetary policies implemented by central banks.
Despite market predictions of a significant shift in Federal Reserve policies, Fitch projects a modest reduction in interest rates, foreseeing a 75 basis point decrease across the next year, which would adjust the Fed Funds rate to around 4.75%.
This scenario suggests that corporations will continue to grapple with elevated borrowing costs throughout 2024, posing significant financial challenges. Fitch's analysis reveals that many companies, particularly those with stressed bonds and loans, are facing operational difficulties, are generating low or even negative free cash flow, and are struggling to organically boost EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) sufficiently to manage their hefty debt loads.
Since the close of 2022, there has been a noticeable increase in defaults among US bond and loan issuers. The default rate for leveraged loans has escalated from 1.6% to 3.04%, and for high-yield bonds, it has risen from 1.35% to 2.99%. The year has witnessed 127 corporate debt defaults, a 13% surge above the five-year average, with some firms experiencing nearly tripled borrowing costs compared to previous years.
Looking ahead to 2024, Fitch estimates that the default rates for leveraged loans could climb to between 3.5% and 4.0%. High-yield bond defaults are projected to reach even higher levels, between 5.0% and 5.5%, which is more than sixfold the default rate among all such issuers in 2021.
Companies like WeWork, which declared bankruptcy this year and exemplifies a 'zombie firm', are particularly at risk. These businesses, characterized by limited cash reserves, find it increasingly challenging to meet their borrowing needs.
Fitch's forecast for a higher default rate in 2024 is influenced by several macroeconomic factors, including sustained high interest rates and a projected deceleration in the US economy relative to 2023. However, Fitch does not anticipate a recession in the US for 2024.
The likelihood of a surge in bankruptcies has been a topic of discussion on Wall Street for some time. Bank of America, for instance, is predicting distressed high-yield debt to reach $46 billion in 2024 and expects default rates to accelerate to 3.4%. This underscores the need for wealth advisors and RIAs to stay vigilant and adapt their strategies to navigate the evolving economic landscape.
