Junk Bond Defaults Are Rising, Despite Healthy-Seeming Economy, S&P Says

Distress in the high-yield market often is a sign of pending trouble. But economists are backing off of their recession forecasts.



U.S. junk bond default rates are edging up, now at 3.2% of issuers, and likely will rise more than a full percentage point by mid-2024, to 4.5%, according to S&P Global Ratings. In the worst case, meaning a recession has arrived, the rate could hit 6.5%, the agency warned in a report.

High-yield defaults are viewed as harbingers for the economy, as they reflect the condition of the weakest companies. If junk defaults reached 6.5%, that would equal where they were in the brief 2020 recession, but nowhere near the 10% level of 2008, amid the financial crisis. S&P also had a best-case scenario for 2024 in which the economy achieved a soft landing: The default rate would then fall to 2%.

Right now, the nation’s economy appears to be in decent shape, with economists dialing back their earlier forecasts that a recession would arrive in late 2023 or early 2024. Unemployment is low, and gross domestic product growth, while sluggish, inched up in this year’s second quarter to 2.4% annually from 2.0% in the previous period.

But there are some worrisome forces at work, as the S&P research paper recounted. “In our base case, we expect defaults to continue rising as corporates grapple with higher interest rates and slower growth ahead,” it stated. “Rising rates are eroding profitability, and second-quarter earnings estimates forecast declining profits relative to a year ago, in aggregate.”

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Weaknesses are appearing in the consumer-oriented sectors, noted the report, by S&P’s Nick Kraemer, head of ratings performance analytics, and Jon Palmer, associate director for credit research and insights. They wrote that consumer products, media and entertainment, retail and restaurants “comprise a large portion of our weakest issuers … and show early signs of strain.”

Moreover, the default trend is upward. Torsten Sløk, chief economist at Apollo Global Management, told Barron’s last week that he worried about the current escalation of junk-rated companies not meeting their payment obligations: “This pickup in defaults started very unusually when we have a strong economic backdrop.”

On the other hand, there is a school of thought that junk defaults will be milder up ahead. Take Gurpreet Gill, macro strategist for fixed income and liquidity solutions at Goldman Sachs Asset Management. In a firm video presentation, she argued that junk is higher quality these days because the shakier credits went out of business during the pandemic.

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NYC Comptroller, Pensions Urge Hollywood CEOs to Resolve Strikes

Brad Lander warns that a prolonged work stoppage may harm the ‘long-term stability' of investments held by the city’s pension funds.


New York City Comptroller Brad Lander is calling on Disney, Paramount and Comcast to resolve the ongoing strikes in Hollywood over concerns they could “threaten the long-term stability” of investments in the companies held by the city’s five pension funds.

The New York City Retirement System, which manages more than $250 billion in assets, collectively own approximately 6.3 million shares in Comcast’s NBCUniversal Media LLC worth $272.7 million, 2.7 million shares in the Walt Disney Co. valued at $229.2 million, and 21,000 Class A shares and 691,000 Class B shares in Paramount Pictures Corp. worth more than $10 million. In toto, those stakes amount to around 0.2% of the pension program’s assets.

Lander, on behalf of the other trustees of the city’s pension funds, sent letters to Comcast Chairman and CEO Brian Roberts, Disney CEO Bob Iger and Paramount CEO and President Robert Bakish urging them to address the ongoing strikes by the Writers Guild of America and the Screen Actors Guild and American Federation of Television and Radio Artists.

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“My fellow NYCRS trustees and I have a fiduciary duty to safeguard the financial stability of our members’ assets and address issues that may present risks to NYCRS’ investments,” Lander said in the letters. He also said that he is “concerned that the underlying business practices which led to this conflict, if not resolved, may threaten the long-term stability of NYCRS’ investments in your company.”

Landers noted that thousands of professional writers belonging to the WGA started picketing May 2 and that the SAG-AFTRA, which represents 160,000 actors and performers, has been on strike since July 14.

“Growing production delays and cancellations resulting from the strikes pose risks to all media companies,” Lander wrote. “Streaming services rely on a continuous influx of new scripted content to keep customers subscribed and engaged. The longer that new content is delayed, the greater the risk that consumers will cancel their services.”

Landers added that the risks from the strikes are “particularly pronounced” for traditional media companies like Comcast, Disney and Paramount because of the importance of broadcast and cable television to their businesses.

“The strikes’ disruption to the writing and production of dozens of scripted series intended for fall 2023 debuts will lead to delays in fall broadcast programming and potentially truncated seasons, along with postponed theatrical releases,” he wrote.

He added: “The impact will extend to these traditional media companies’ new streaming businesses, which must compete with tech companies like Netflix, Amazon, and Apple and which rely on a steady flow of new broadcast episodes and theatrical movies to supplement the original programming on their platforms.”

Representatives for Disney, Paramount and Comcast did not immediately respond to a request for comment.

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