Europe’s high-yield bond and leverage loan markets are likely to see rising default rates and net downgrades in 2023, Fitch Ratings says in a new report. Weaker growth conditions and rising interest expenses will weigh on operational and financial outlook, limiting the ability of some issuers to reduce leverage and maintain debt service profiles in line with their ratings.
 
While the developed European market for high-yield bonds and leveraged loans continued to see low default rates at below 2% during 2022, and secondary markets continued to demonstrate resilience since the sell-off at end-3Q22, we expect an increasing number of stressed issuers with 2023 and 2024 maturities. In the absence of credible primary market refinancing alternatives as maturities approach, we expect more issuers to hire restructuring advisors, or engage in distressed debt exchanges.
 
We forecast the developed European market for high-yield bonds to see a rise in default rates for the trailing-12-months (TTM) to 2023 to 2.5%, and to 4% by end-2024. We also expect a 4.5% TTM 2023 default rate for European leveraged loans, with a slight decline to 4% by end-2024. Default-rate forecasts for loans are modestly higher in 2023, due to more issuers with ‘at-risk’ ratings, which we define as ‘B-’ with Negative Outlook and below; more issuers being hit by benchmark floating-rate policy rate rises; and more issuers with 2023 and 2024 maturities.
 
The European high-yield bond market has fewer low-rated issuers as a percentage of the broader market. However, it has more consumer and industrial cyclical credits in the bond market. These will likely exhibit more earnings volatility as cost-of-living pressures erode demand conditions. UK issuers face stronger economic and capital-market challenges than eurozone issuers into 2024.