Turbulence Expected for Credit Markets in 2024

Economic Update

The U.S. manufacturing rate has contracted for 14 consecutive months with a slight bump in December at 47.4% on the ISM Index. Unemployment held steady at 3.7% and added roughly 216,000 jobs, which was above consensus. Inflation closed out the year at 3.4% up 0.3% for the month of December, which caps many months of efforts to successfully tame it. We believe rate cuts will be pushed out further into the year as inflation seems to be sticking around.

Insolvencies 

Commercial Chapter 11 filings surged in December 2023, with filings up 72% compared to the same month in 2022. This marks a continuation of a worrying trend, with total bankruptcies also up 18%. Small businesses were particularly hard hit, with filings under the streamlined. Subchapter V process increasing by a staggering 45%. This trend is par for the course as we expect this momentum to carry over into 2024 as more companies seek this type of protection.

State of Corporate Credit

Credit performance ended the year trending downward and most expect this will continue as a third of sectors are planning for a pessimistic 2024. Downgrades increased year over year by 4.0% and defaults reached the second highest level since 2009. Overall, we believe credit metrics will deteriorate as stress levels stay elevated and continue to grow.

Current & Evolving Credit Risks

Soaring Debt Levels
Leverage will be a big focus in 2024 as it will remain higher than at any point over the last ten years. Lower-rated borrowers will have little to no flexibility as they will be saddled with high debt and high borrowing costs. This group will likely try to avert additional borrowings to stave off further credit deterioration and protect credit quality until rates are more favorable.

Defaults Leap
Corporate defaults show no signs of slowing down in the early months of 2024, with six companies already succumbing to financial pressure. This follows a staggering 80% surge in defaults throughout 2023, a trend further corroborated by a 20% increase in downgrades exceeding upgrades last year. Over half of the 2024 defaults have cited missed interest payments as the culprit. We note credit performance will be negatively influenced by elevated rates and debt loads.

Freight Concerns
Attacks on the Red Sea have impacted global supply chains with longer wait times, additional surcharges, and rising insurance costs. We note the Panama Canal is facing its own issues with droughts leading to limited movement of vessels. This dual threat scenario will be felt throughout 2024 as freight rates will stay elevated and volatile as supply chain stresses creep back into focus.

Date Published: January 17, 2024