The percentage of companies that have defaulted on their debt more than once has reached its second highest level since 2008

The percentage of companies that have defaulted on their debt more than once has reached its second highest level since 2008, according to a new report from S&P Global Ratings.

Around 35% of total global defaults in 2023 were by issuers that are considered "re-defaulters," a trend that is also impacting recoveries, noted Nicole Serino, director of credit research and insights at S&P Global Ratings. This trend is partially driven by an increase in the number of issuers with ratings of B- or below, indicating high debt levels.

"These capital structures were established during periods of lower interest rates and with the expectation of continued low rates," explained Serino in an interview. "You saw that bubble grow, and grow, and grow."

The unexpected rise in consumer inflation has led to reduced expectations for Federal Reserve rate cuts this year. This "higher-for-longer" environment will pose challenges for highly leveraged, high-risk companies, especially those that have already defaulted.

The increase in re-defaults coincides with a growing number of borrowers opting for distressed exchanges, which are agreements that result in losses for creditors but help companies and their owners avoid bankruptcy.

However, S&P Global Ratings views these transactions as offering only "a temporary reprieve to issuers in regaining their footing." The report identifies the largest share of borrowers in selective default as being re-rated CCC+, a rating that indicates a high likelihood of defaulting again. The analysis also reveals that investors experience greater losses on capital structures that have defaulted multiple times, particularly in senior unsecured bonds, where recoveries have declined from approximately 60% to around 40%.

S&P estimates that the US speculative-grade default rate was 4.8% through the end of March, measuring the percentage of issuers defaulting in the trailing twelve months.