Inflation driving U.S. defaults: Fitch

Ongoing inflationary pressures are pushing more U.S. companies toward debt defaults, Fitch Ratings reports.

In a research note, the rating agency said its tally of riskiest loans rose by US$3.8 billion to US$63.5 billion in June — almost double the US$33.32 billion total from a year ago — driven largely by the impact of inflation on struggling borrowers.

Fitch noted that distressed companies are “contending with higher input costs amid a worsening macroeconomic operating environment.”

And, while the Fed paused its interest rate increases in June, the rating agency said it expects rate hikes to resume later this year, adding further pressure to at-risk borrowers.

“This will negatively affect the ability of weaker borrowers to refinance and address liquidity needs,” it noted.

By sector, the healthcare/pharma sector accounts for the largest share of distressed loans at about 33%, followed by leisure/entertainment at 11%, Fitch said.

“The leisure and entertainment sector is particularly vulnerable to macroeconomic pressures as discretionary demand is likely to see a pull-back as consumers face challenging environments,” it said.

Amid these headwinds, the U.S. leveraged loan default rate rose to 2.9% in June — and, for the first half, defaults totalled US$33.7 billion from 39 issuers, up from US$10.6 billion in defaults from 11 issuers, for the same period last year, Fitch reported.

Fitch recently raised its default rate forecast for 2023 to 4.0%-4.5% from 2.5%-3.0%, “reflecting tighter lending conditions and lower risk appetite on the back of stress in the banking sector and inflation uncertainty.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.