Companies have extended their debt maturities, averting a 'tsunami of defaults' from higher rates, Bernstein says
- Investors can expect a "moderate default rate" in the next 12 to 18 months, Bernstein analysts wrote.
- Despite higher interest rates, companies have extended their debt maturities, easing pressure.
Companies have extended their debt maturities, easing the much-feared impact of rate hikes from the Federal Reserve.
And as long as bond investors remain attentive to credit quality, there's little reason to panic over a weaker corporate environment, a Bernstein note said on Friday.
"We expect a moderate default rate for the next 12 to 18 months — around 4% to 5% — rather than a tsunami of defaults and downgrades," analysts led by Tiffanie Wong wrote. "That said, we think investors should favor higher-quality credits, remain selective and pay attention to liquidity."
While higher-for-longer monetary policy does add to default risk by lowering growth and boosting borrowing costs, the extensions on debt maturities mean that only 10% of the high-yield market will mature by the end of next year, according to Bernstein wrote.
And of that amount, 74% are higher-quality bonds, which are less vulnerable to economic decline.
Meanwhile, a surge of defaults during the pandemic era already removed the biggest at-risk corporate players, and those who remain have become more fiscally responsible, Bernstein added.
"Sound balance sheets mean corporate issuers can withstand increased pressure as growth and demand slow. This is reflected in corporate credit ratings, which have improved across the entire investment-grade universe, with upgrades outpacing downgrades by a wide margin," analysts wrote.
To Bernstein's point, a new study has found that larger companies have maintained greater access to credit and equity markets, helping them weather macroeconomic challenges. Instead, middle-market companies are facing the most distress.
Still, Fitch Ratings cautioned last month that corporate defaults will rise this year in both the US and the eurozone as the impact of tighter central bank policy will continue to work its way through the economy.
In addition, commercial real estate remains under pressure. On Tuesday, the Mortgage Bankers Association found that delinquency rates in the sector rose over the fourth quarter, led by office properties.