According to a report by Janus Henderson Investors, corporate credit quality is weaker than financial markets currently anticipate. The report suggests that defaults are likely to increase in the second half of the year. Indicators such as debt loads, access to capital markets, cash flow, and earnings continue to show signs of deterioration. The asset manager’s global credit risk monitor also highlights tighter lending standards, higher refinancing costs, and a slowing economy as factors that will impact the credit quality of corporates.
The report predicts that defaults could pick up in the second half, although at a slower pace than in previous cycles. It also notes a trend of small businesses filing for bankruptcy, which is expected to spread into capital markets. S&P Global predicts default rates for U.S. and European sub-investment grade companies to rise by March 2024. French retailer Casino is one example of a debt-laden firm that has been downgraded and forced to negotiate with creditors to restructure its liabilities.
Despite rising default risks, investors have remained largely unaffected by the low cost of insuring exposure to European junk-rated corporates. Janus Henderson Investors warns that markets have been pricing in a more muted credit default cycle. However, the asset manager believes that more “trouble credits” will emerge due to the impact of tighter policies, although the timeline for this may be protracted.
