- The credit crunch will result in a wave of defaults hitting different sectors of the economy, BofA said.
- Strategists said a "rolling blackout" of defaults had already started in some sectors.
Tighter credit conditions will bring about a wave of corporate defaults that will roll through sectors of the economy, Bank of America said.
"A rolling blackout is the least disruptive way for credit to align to a new rates regime. As the rates shock steadily makes its way through the credit ecosystem, sectors respond at varying lags," strategists said in a note on Monday, predicting corporate defaults would hit sectors at different times.
"This way we avoid a cathartic purge, preventing large mark to market losses and high peak default rates. We still land up cleaning out untenable capital structures, but on a stretched-out timeline."
That "rolling blackout" of defaults has already started, strategists added, referring to signs of trouble in various sectors. Areas like healthcare, real estate, tech, and financials have already suffered a wave of volatility as firms faced earnings pressure, and unaffected sectors, like travel and leisure, could soon feel the pain as well.
Signs of trouble have also been brewing in various credit markets. High-yield bonds and US loans have seen an flurry of defaults over the past year, according to data from Deutsche Bank. Smaller, weak companies have also seen surge of repeat bankruptcies, and late payments on commercial mortgages jumped over the first quarter.
The total default rate at the end of the current credit cycle will likely land around 15%, the bank said. A less-severe rolling blackout will result in a 3-4% default rate over the next few years -- but only if the US avoids a recession.
If the US does tip into a full-blown recession, defaults could come on even faster and notch 6-7% in 2024, the bank said, previously predicting $1 trillion in corporate defaults in event of a downturn.
Wall Street strategists have been eyeing the credit crunch since the collapse of Silicon Valley Bank in early March. Higher interest rates and stricter lending standard among banks will make credit availability scarcer, potentially making it hard for some companies to fund themselves.