The corporate credit market is entering a period marked by rising risk of default, according to recent reports by Standard & Poor's Ratings Services and Moody's Investment Services. This shift is attributed to rising default risk in China, the world's largest corporate debt market, as well as the increase in leveraged financing in the U.S.
Risk managers and corporate lenders need to be aware of these trends, and how they can affect demand in their markets. Global outstanding corporate debt, including existing, refunded and new debt is expected to reach $71 trillion by 2019, with $20 trillion of that total coming from new issuances. Refinancing requests are anticipated to represent $37 trillion of demand, buoyed by low interest rates.
"However, the rapid growth in debt, the opaque nature of its markets, high debt-to-GDP, and potential moral hazard created by state support all point to relatively high credit risks in China," said Jayan Dhru, Global Head of Corporate Ratings and Infrastructure at Standard & Poor's. "In the U.S., the growth of the leveraged finance segment also suggests increased risks. The seeds of tomorrow's debt crisis may already have been sown in these two regions."
Moody's Investor Services reports that U.S. corporate credit quality weakened slightly in the second quarter of 2015, caused by a rise in the number of companies rated B3 or lower, which points to a higher risk of default. The report also showed that the recovery rate expectations for leveraged loans declined for the second straight quarter, hitting collateralized loan obligations particularly hard.