Less availability of credit and capital
With tighter lending standards, less available bank liquidity and banks looking to reduce risk exposure, many companies will be pushed into the more expensive bond market. This adds some additional pressure on supply, particularly in certain market segments. This will subsequently be a further negative factor for spreads and will once again lead to higher cost of debt for high yielding companies. Additionally, there is now a lack of access to IPOs, LBOs and private equity, putting even more pressure on companies’ ability to refinance.
Worsening economic environment
The combination of persistent and sticky inflation and the resulting pressure on the economy adds another ingredient to the melting pot of pressures on businesses. Our economists consider a recession realistic for the United States in 2024, while growth in the eurozone is also expected to weaken (from 0.5% to 0.4% year-on-year). While rates are expected to decline throughout 2024, our economists expect them to remain substantially higher than before the pandemic.
Lack of government/central bank support
We believe many lower-rated companies have stayed afloat thanks to strong support from governments and central banks. This has included asset purchases and stimulus from central banks, as well as more localized support from governments during the Covid crisis and the very cheap funding environment of recent years. Some weak business plans may not be able to survive increased financing, quantitative tightening, and an unfavorable recessionary environment, leading to subsequent failure.
Changing landscape for certain sectors
Additionally, there have been very significant changes to the landscape in a post-Covid world, where we see a notable shift in consumer spending patterns as well as changing dynamics in the wake of high inflation. This changing environment has put some sectors under considerable pressure. This has also led to an uptick in rating downgrades on high-yield debt. Some of the sectors that have been affected include freight, travel, leisure, retail, and energy- and labor-intensive industrial and manufacturing sectors with competitive but low margins.
Pressure on metrics
Once again, high inflation, a worsening economic outlook, a changing landscape and the higher cost of debt are factors that will have a negative effect on businesses. This is being seen in the credit metrics, specifically in the negative turn in the free cash flow (FCF) numbers, as illustrated below. EBITDA figures, on the other hand, have seen a positive rebound this year.