[Asia Economy Reporter Park Byung-hee] Credit rating agency Moody's has warned that the corporate default rate will increase by 3 to 4 times next year. Moody's stated, "If interest rates continue to rise and the global economy slows down, speculative-grade (non-investment grade) companies will face reduced net profits and increased debt costs, leading to a rise in default rates."
According to Bloomberg News on the 3rd (local time), Moody's forecasted in a report released that day that the current U.S. corporate default rate, which is below 2%, will rise to 7.8% by August next year. The corporate default rate in the Europe, Middle East, and Africa (EMEA) region, currently at 2%, is expected to increase to 6.5%. Moody's noted that 65% of speculative-grade companies in the U.S. and EMEA are rated B2 or B3. B2 and B3 are respectively 5 and 6 grades lower than investment-grade ratings.
As the U.S., the global reserve currency country, has raised its benchmark interest rate by 3 percentage points since March, interest rates worldwide have risen, leading to increased funding costs for companies.
According to Moody's, last year’s funding through bonds and loans reached a record high of $1.6 trillion, but this year’s funding volume is only $315 billion. The rise in interest rates has made it more difficult for companies to secure the necessary funds. In this situation, concerns are growing that companies may fail to repay their debts as profits decline due to economic slowdown.
Investment bank Morgan Stanley predicted that due to the strong dollar effect, the net profits of S&P 500 companies could decrease by about 10% in the fourth quarter of this year.
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