Due to High Interest Rate Burden...Global Corporate Defaults Reach Highest Since Financial Crisis

The number of corporate defaults among global companies this year has been the highest since the financial crisis. This is due to the prolonged high interest rates amid persistent inflation, which has increased the borrowing burden on companies.

According to S&P Global Ratings on the 14th (local time), there have been 29 corporate defaults worldwide so far this year. This is the highest number since 37 defaults were recorded in 2009, immediately after the global financial crisis, for the same period. S&P Global explained, "The number of companies struggling with repayments is increasing due to rising debt burdens caused by recent declines in consumer demand, wage increases, and high interest rates."

In February alone, 15 companies including U.S. companies Hornblower, GoTo, Apex, Radiology Partners, and the UK’s Bue Entertainment were identified as having defaulted. Among these, 40% belong to the healthcare/medical or media/entertainment sectors. S&P Global assessed that since companies with negative short-term cash flow are concentrated in these sectors and their outlook is poor, more companies may face default situations in the future. Consumer goods companies were also mentioned as sectors with a high possibility of additional defaults.

Notably, S&P Global classified 14 out of the 29 defaults this year as ‘distressed exchanges.’ This refers to transactions where companies transfer assets at values lower than the face value of debt or restructure debt to avoid bankruptcy proceedings. The high proportion of distressed exchanges is also the first occurrence since 2008.

Torsten Slok, Chief Economist at Apollo, said, "This shows exactly what has been happening since the Federal Reserve’s rate hikes began in March 2022," adding, "Default rates are rising because high interest rates are continuously hitting companies with high debt levels hard."

By country, the United States had the highest number with 17 cases. In Europe, where recession concerns had been highlighted, defaults doubled compared to previous years with 8 cases. S&P Global noted, "There are still many low-rated companies in the European region," and forecasted, "With defaults increasing in Europe in the short term, the default rate is expected to rise slightly this summer."

However, optimistic factors include improving macroeconomic outlooks, led by the U.S. where a soft landing is increasingly expected, and the anticipation that major countries will begin cutting interest rates in earnest from the second half of the year.

Currently, Wall Street largely expects the Fed to cut rates in June. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) futures market is pricing in more than a 62% chance of a rate cut in June. The European Central Bank (ECB) is also expected to cut rates in June. ECB member and Governor of the Bank of Greece, Yanis Stournaras, stated that after the first rate cut in June, two additional cuts will be necessary by the end of the year.

This content was produced with the assistance of AI translation services.