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Companies holding low-rated debt are in for a brutal stretch as the economy heads into a coronavirus-induced recession, according to a forecast Friday.
S&P Global Ratings said the default rate for high-yield, or junk, bonds is heading to 10% over the next 12 months, more than triple the rate of 3.1% that closed out 2019.
“The current recession in the U.S. this year is coming at a time when the speculative-grade market is historically vulnerable to a liquidity freeze or an earnings drop,” Nick Kraemer head of S&P Global Ratings Performance Analytics, said in a statement.
The dour outlook comes against a sudden stop in U.S. economic activity brought about by preventive measures against the COVID-19 spread. Wall Street forecasts see GDP dropping as much as 10% before recovery and unemployment spiking to perhaps 10% or worse.
The S&P High Yield Bond index has been falling rapidly, down 9.5% over the past week.
But cracks in the high-yield market already were beginning to show before the coronavirus crisis.
Fixed-income pros have been warning that companies with lower-level investment-grade debt were in danger of tipping into junk territory, a move that would have a cascading effect as funds invested in those bonds would have to sell them. Speculative-grade debt with low ratings now makes up about 30% of the space, S&P said.
In making its forecast, S&P conceded that data remains scarce in determining how bad conditions could get.
But the firm said that if efforts to fight the disease drag on and stimulus isn’t as effective as hoped, the recession could drag on and take default rates as high as 13%.