Santander | And Moody’s HY default rate rises to 2.9%, in line with the progressive deterioration of the credit quality of companies globally. Moody’s published its monthly report last Friday in which it states that there were 15 defaults in March, its highest monthly number since December 2020 and which places the balance of 1Q23 at 33 defaults (its highest quarterly volume since 4Q20, of which 24 correspond to US issuers, seven European and two from Latin America).
Among the defaults in March were those of Silicon Valley Bank (the first default of a US bank since 2015), its parent SVB Financial Group and Signature Bank. Moody’s global HY default rate thus increased by +0.1pp in March to 2.9%, still low compared to its historical average of 4.1%.
However, the agency expects the default rate to rise to 4.6% by the end of this year and to 4.9% by March 2024, which could put pressure on banks’ NPL ratios in the medium to long term. The main reasons for this increase in default rates, according to Moody’s, are the current context of rising interest rates and slower economic growth, as well as tighter funding conditions.
In addition, Moody’s adds two pessimistic scenarios in view of the existing risks: a moderate pessimistic scenario, where the default rate would rebound to 8.8%, and a severe pessimistic scenario, to 13.9%, exceeding in this extreme scenario both the 7% of the peak of the pandemic and the 13.5% of the Great Financial Crisis.
In terms of geography, the European HY default rate stands at 2.6% in March and that of the US at 2.7%. Moreover, Moody’s expects the European rate to rise over the next 12 months to a significantly lower level of 4.1% vs. 5.6% in the US. This expected increase in default rates is in line with the deterioration in credit quality, which is already evident in Moody’s rating drift series, where downgrades outnumber upgrades by 5% both globally and in the US. In Europe, however, upgrades still slightly outnumber downgrades by 2%.
