“Hangover from years of lenient credit may become painful.”
Credit rating agencies, such as Standard & Poor’s, are not known for early warnings. They’re mired in conflicts of interest and reluctant to cut ratings for fear of losing clients. When they finally do warn, it’s late and it’s feeble, and the problem is already here and it’s big.
So Standard & Poor’s, via a report by S&P Capital IQ, just warned about US corporate borrowers’ average credit rating, which at “BB,” and thus in junk territory, hit a record low, even “below the average we recorded in the aftermath of the 2008-2009 credit crisis.”
The one-year average default rate for US companies with a credit rating of B- is 9.8%, according to Standard & Poor’s. That’s a 1-in-10 chance that the company will default over the next 12 months. Companies getting downgraded deep into junk and issuing more low-grade bonds are precursors to soaring defaults.
The signs have been piling up. S&P Capital IQ:
In 2015, Standard & Poor’s downgraded 5.54% of the U.S. speculative-grade nonfinancial corporate borrowers it rates — the highest level since 2009.
The average credit rating for U.S. nonfinancial corporate issuers has fallen to a record low due to the continued rapid rise in lower-quality borrowers.
As a result, nonfinancial corporate borrowers’ net negative bias is at a post-recession high and the speculative-grade downgrade rate is at the highest level since 2009.
We believe a more conservative lending environment, where more limited capital market access enables lenders to better dictate terms and conditions, could spark liquidity challenges, accelerate downgrades, and ultimately lead to a spike in defaults.