Debt investors’ calm may end in 2025 as firms grapple with hefty borrowings and expensive refinancing. Corporate bankruptcies have remained low despite rising interest rates, with Moody’s reporting a 4.6% global default rate in October 2024. Central banks’ easing may briefly lower defaults further, possibly below 3% by October 2025. However, corporate balance sheets remain fragile. S&P Global notes $489 billion of debt rated CCC or lower as of October 2024, marking a risky threshold for refinancing.
Central banks keeping rates high, perhaps due to inflation, could strain leveraged firms. Speculative-grade debt maturities in the U.S. and Europe are expected to more than double between 2025 and 2026, hitting $449 billion, with refinancing challenges looming.
Private-debt markets, which allowed companies to avoid defaults, now show signs of stress. Non-performing private-credit loans have nearly tripled since mid-2022, according to MSCI. EBITDA-to-interest-cost ratios for private companies dropped to just 1.7 times by September 2024, from over 3 times in 2021, leaving little margin for downturns.
Investors, lured by low-risk premiums, may face shocks if defaults climb. High-yield bond spreads dropped below 3 percentage points after the Trump-era rally, exposing holders to potential losses. At a modest default rate of just over 5%, bondholders could see returns wiped out, given historic recovery rates of 40%.
With mounting pressures, 2025 could mark a turbulent year for debt markets.
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