JP Morgan: Corporate Repeat Default Rate Reaches Record High in 2024

A new report from JPMorgan Chase shows that high-risk companies are repeating defaults at a record pace in 2024. The report, written by strategist Nelson Jantzen, states that approximately 35% of defaults and distressed transactions this year are repeat defaults. Meanwhile, the default rate for leveraged loans is at its highest level in four years. For most of last year, interest rates remained at relatively high levels, weakening the balance sheets of lower-rated companies. This impact is particularly evident in the leveraged loan market, as these issuers borrow on a floating rate basis, and when the Fed raises rates, some issuers' interest costs almost double. Despite the Fed cutting rates three times last year, it has indicated that it will slow down rate cuts in 2025. Compared to the high-yield bond market, the proportion of lower-rated bond issuers in the loan market is higher, as private equity companies are increasingly using this asset class in a near-zero interest rate environment. The report states that this means the default rate in the loan market far exceeds that of the high-yield bond market, with the gap between the two reaching its highest level in 24 years. As of the end of the year, the partially weighted default rate for US high-yield bonds was 1.47%, while the same indicator for loans was 4.49%. More and more highly indebted loan issuers are taking so-called debt management measures to reshape their capital structures, often when facing upcoming maturities or cash shortages. The report states that a record 70% of defaults and transactions in 2024 were caused by distressed trades. However, these trades do not always reduce enough debt to turn the company around, and borrowers may ultimately default again, resulting in lower returns for investors.