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Corporate Debt: Defaults, Downgrades And Fallen Angels

AllianceBernstein (AB) profile picture
AllianceBernstein (AB)


  • A wave of rating downgrades, fallen angels and corporate bond defaults has begun.
  • It could grow into a tsunami before the pandemic recedes.
  • That doesn't mean investors should stay out of the water.

By Susan Hutman and Robert Hopper

The coronavirus pandemic continues to wreak havoc across economies and markets. A wave of rating downgrades, fallen angels and corporate bond defaults has begun - and it could grow into a tsunami before the pandemic recedes.

But that doesn't mean investors should stay out of the water. In many cases, today's yields more than adequately compensate bondholders for potential losses. Here's what we expect.

Corporate Bond Defaults Will Spike

In March and early April, as economies around the world ground to a halt and liquidity challenges skyrocketed, investors sold corporate bonds in record numbers for fear of a surge in downgrades and defaults. Forced sales exacerbated the liquidity spiral. Corporate bond spreads soared as prices dropped.

The default rate-including imminent defaults-in the US high-yield market has already picked up, to 3.2% year to date, according to J.P. Morgan. But we aren't yet out of the woods.

We think the US and other developed-market economies will remain shuttered until early summer. Economic activity will likely resume slowly in the second half of the year. In this base-case scenario, we expect the US high-yield default rate to climb to between 10% and 13% over the next 12 months. Global default rates will likely be somewhat lower.

Should the pandemic require a longer shutdown, or if the recession is worse than we currently expect, US high-yield defaults could be as high as 15%-20%. That's our downside scenario.

With the opening of various credit market facilities, corporate yield spreads have retreated somewhat from their highs. But a significant share of the market continues to trade at spreads above 1,500 basis points. That suggests to us that the market is pricing in defaults in line with our base-case scenario. In other words, spreads on many corporate bonds amply compensate investors for the coming default

This article was written by

AllianceBernstein (AB) profile picture
AB is a research-driven investment firm that combines investment insight and innovative thinking to deliver results for our clients. At AB we believe that research excellence is the key to better outcomes and as a result we have built a global firm with exceptional research capabilities. We offer a broad array of investment services that span geographies and asset classes to meet the needs of private clients, mutual fund investors and institutional clients around the world.

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Comments (2)

surfer101 profile picture
So you are thankful the fed is buying into more market areas. More distortion. Why are the yields on junk funds so low when they should be zooming higher given the risk? The fed giving lifelines!
chgooldtown profile picture
Author lists around ten income/funds at top of article Maybe they are worth pursuing?
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