Corporate debt defaults have been climbing all year
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U.S. companies' debt default rates have been unusually low since 2021, but that's changing now.
What's happening: The default rate has been climbing all year, and in November it reached its historical average of 4.1%, according to S&P Global Ratings.
Why it matters: The Fed's interest rate hikes are squeezing company balance sheets. Defaults are going up as a growing number of companies can't make their interest payments, or can't afford to refinance their debt.
- And even if the Fed cuts interest rates a few times next year, they'll still be pretty high — so defaults could keep on rising.
State of play: Defaults often go hand-in-hand with bankruptcy — but defaults are a broader measure.
- This year, 43 of the 89 U.S. defaults didn't involve bankruptcies; they were what's known as "distressed exchanges."
In a distressed exchange, the lender agrees to a deal in which it won't get paid back in full, but it gets something in return, like a higher priority spot in the company's debt structure.
- The point of these types of deals is to limit the downside for the lender, while helping to create a more sustainable debt structure for the company.
- For example: Carvana, creator of the famed "car vending machines," did one such deal in July, which helped it avoid a full-blown bankruptcy.
Of note: The default data includes all the companies with credit ratings from S&P — that means it's mainly larger companies with bonds or loans that trade in the market. It doesn't include companies that have borrowed in the growing private debt sector.
