Tabula CEO comments on severity of defaults in North American corporate credit
A note from Tabula Investment Management CEO Michael John Lytle reveals that this year and 2021 could see a big increase in the number of US high yield defaults. Lytle believes that the financial market indicators are optimistic relative to both credit and economic indicators.
Michael John Lytle says investors should review their allocation to high yield US debt and develop investment strategies to hedge against a rise in defaults.
Despite the recovery in equity markets the outlook for North American corporate credit paints a different picture; YTD defaults in North American corporate credit are the highest since 2009, Lytle says. He quotes credit agency Fitch who, in 2020, raised its 2020 ‘base case’ default rate for US high yield to 5-6 per cent, with a ‘severe case’ forecast of up to 10 per cent, highlighting the energy sector as particularly vulnerable.
Lytle also quotes Moody’s optimistic scenario, published in April, which saw defaults in North American speculative credit peaking at over 13 per cent in March 2021, noting that their pessimistic scenario was for well over 20 per cent.
“S&P’s base case is for the 12-month trailing US speculative grade corporate default rate to hit 12.5 per cent by March 2021 (vs 3.5 per cent in March 2020) which requires 233 companies to default. Even in their optimistic scenario defaults will almost double (6 per cent by March 2021 and 112 defaults). Pessimistic scenario sees default rate expand to 15.5 per cent (with almost 300 defaults),” Lytle writes.