Deutsche Bank (Deutsche Bank) said on Monday (21st) that as the global economic outlook deteriorates, the default rate of U.S. leveraged debt will reach a near record high of 11.3% in 2024, whileEURThe default rate on leveraged loans will reach 7.1%.
However, Deutsche Bank said that given the lack of short-term maturities, the default rate in 2023 will be contained, and it expects the U.S. andEURDefault rates in the market are 5.6% and 3.7%, respectively, however default rates will also start to climb from this time on. Leveraged loans are typically issued by companies with already high levels of debt and credit ratings below investment grade.
Deutsche Bank analysts said that with the U.S. economy likely to fall into recession in the second half of next year, corporate profit margins with high debt-to-income ratios (DTI) will face a major hit, which will cause more exchanges to struggle and cannot pay interest Default rates rise in 2024.
In addition, the expected increase in default rates will be accompanied by lower recovery rates, which means that in the coming recession, if a loan defaults, creditors may only get back 50%-60% of the face value.
The good news for European issuers is that while leverage is high, it is not as high as in U.S. credit markets, Deutsche Bank said, whileEURThe high-yield bond market has higher credit ratings than the U.S. bond market.
Deutsche Bank also hinted that European credit should outperform U.S. credit in the coming downturn as the European Central Bank (ECB)’s Transmission Protection Instrument (TPI) underpins it and the overallEURThere is still room for additional fiscal spending in the region to prevent a larger wave of defaults.
By contrast, Deutsche Bank is less confident regarding the Federal Reserve’s reintroduction of quantitative easing or a U.S. fiscal stimulus plan during next year’s recession, given the divided U.S. Congress following the midterm elections. Also, with US inflation set to remain above 2% when defaults start to rise, room for monetary stimulus may be limited.
Deutsche Bank predicts more resilient high-yield bond markets on both sides of the Atlantic, and 2023EURThe default rate of the market is 2.2%, 4.3% in 2024, and the default rate of the US market is 4.5% and 9%, respectively.
