Line chart shows relationship between increased distress and higher default rates.
Left Y-axis: Distress ratio (% of high yield bonds with spreads exceeding 1,000 basis points), right y-axis: Speculative grade default rate (%); x-axis: 2001-2021
Recessions shown: 2001, 2008-2009, and 2020
Higher distress ratios often are followed by higher default rates. In this time period elevated distress ratios in the three recessions (2001 and 2002 at about 38; 2008 at more than 85; and 2020 at about 31), are followed by elevated default rates (more than 16% in 2002, more than 21% in 2009, and rising from about 3% to near7% in at the end of 2020). A higher distress ratio of 27 in early 2016 was followed by a nearly 6% default rate by the end of that year. Possible exceptions are the higher default rate of 5.6% in 2006 (which was not immediately preceded by elevated distress) and the higher distress ratio of 22 in 2011 (which was not immediately followed by higher defaults). As of year-end 2020 the distress ratio was about 4 and the default rate stood at about 7%. By the end of February 2022 the distress ratio was at 1.9 and the default rate had declined to about 0.29%.
Source: ICE Bank of America. Monthly data from January 1, 2001 to March 31, 2022. One hundred basis points equal 1%. An index is unmanaged and not available for direct investment. The ICE Bank of America U.S. High Yield Index is a market-capitalization-weighted index of domestic and Yankee high-yield bonds. The index tracks the performance of high-yield securities traded in the U.S. bond market. Credit ratings are not intended to indicate the value, suitability, or merit of an investment. They are opinions of credit quality and, in some cases, the expected recovery in the event of default. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities.
- Private Debt strategies focused on distressed or special situations are becoming less attractive as credit spreads have tightened and distressed opportunities have declined. Yet, we still anticipate opportunities for specialized Direct Lending strategies.