High Yield defaults are expect to increase as one would expect. The great unknown is how many fallen angel securities (investment grade securities that are downgraded to high yield status), will there be? This is an open question as for the past number of years billions of Dollars of low quality debt has been packaged and rated as higher quality debt. God love the securitization process and credit rating agencies who apparently are capable of financial alchemy – until it goes bad (see 2008’s mortgage crisis as an example). We quote one of the alchemists below.
- Fitch expects the High Yield default rate to range from 3.0-3.5% in 2023 and 3.0-4.0% in 2024. This implies $43 billion of High Yield defaults in 2023, up from $19 billion in 2022 and $7 billion in 2021.
- For perspective, 2020 saw $69 billion in High Yield defaults (COVID lockdowns) and 2009 (the great recession) registered $113 billion (source: Fitch Ratings).