There is a growing gap between what markets are expecting and a likely wave of defaults among struggling companies before summer 2021, according to an analysis by S&P Global published Monday.
The report by Nick Kraemer, head of S&P Global Ratings Performance Analytics, found that the dire state of the U.S. economy suggests a higher rate of defaults for what are known as speculative-grade companies. His analysis concluded that between this past June and the same month next year, defaults in that sector would rise from 5.4 percent to 12.5 percent.
The baseline scenario, which would see 229 speculative-grade companies default, involved a range of possible outcomes, from as few as 74 defaults to as many as 284.
“This historically wide range of possibilities reflects the growing divergence between market expectations of future defaults and those implied by credit and economic fundamentals during the COVID-19 pandemic and resulting stimulus measures,” said Kraemer.
The analysis went on to say that markets may be too optimistic and aren’t accounting for companies getting by on cheap, borrowed money in the short-term that are ultimately facing solvency problems.
While additional government stimulus could help, Kraemer found, actions that increase corporate debt at a time of low revenues could pave the way for more defaults.