Where Defaults Are Surging

The U.S. is leading the world in defaults, with most of them occurring in four sectors that have been pummeled by the coronavirus pandemic, according to S&P Global.

About 70 percent of corporate defaults in the U.S. are in the consumer products, oil and gas, retail and restaurants, and media and entertainment sectors, S&P Global Ratings said in a report Friday. The credit rater tallied 122 U.S. defaults this year, the highest globally, followed by Europe with 30.

The pace of defaults in the pandemic is faster than during the global financial crisis of 2008 to 2009, S&P analyst Sudeep Kesh said Friday in a phone interview. S&P estimated the trailing 12-month default rate is now at 6.3 percent in the U.S., which compares with a historic average of around 4 percent, he said. 

“The credit environment was very, very vulnerable to some kind of economic shock” before Covid-19 led to lockdowns globally, Kesh said. That’s because companies were aggressively increasing their debt levels for years as interest rates remained low for so long, he explained.

The consumer products sector is the hardest hit by the pandemic. This year 81 percent of defaults by consumer products companies globally are in the U.S., compared to about half at the end of 2019, according to the report. Covid-19 has had an uneven impact on such businesses, S&P said, with food and household products and personal care benefiting from stay-at-home orders during the pandemic while food service, durables, luxury, and apparel have been hurt by social distancing policies.

The U.S. has the largest population of rated companies globally, Kesh said. S&P expects the country’s speculative-grade corporate default rate to rise to 12.5 percent by June 2021, according to a report from the credit ratings firm in late August.

Recent U.S. defaults include specialty apparel retailer Jill Acquisition and TMK Hawk Parent Corp., a provider of food service equipment and supplies, S&P said in its report Friday. 

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Kesh said defaults during the Covid-19 recession were driven by missed interest and principal payments as companies’ revenues dried up. Distressed debt exchanges have been a less significant driver of defaults as the Federal Reserve’s emergency intervention in credit markets earlier this year led to an increase in debt prices, according to Kesh.

While the total number of defaults is “very, very high,” Kesh said that the rate of defaults has been suppressed by the larger pool of speculative-grade borrowers since the financial crisis.