- A credit crunch could more than double the rate some US companies default on debts, Societe Generale said.
- The European bank estimated lending conditions were at their tightest level since the pandemic.
- That could lead US speculative-grade debt defaults to more than double the average rate, it warned.
The crunch in credit conditions could more than double the rate that some US companies will default on their debts, according to Societe Generale.
Strategists at the European bank pointed to tighter lending standards in the US as turmoil ripples through the banking sector. Silicon Valley Bank, First Republic Bank, and other regional lenders have collapsed over the past two months, which is expected to make banks less willing to offer loans.
Credit conditions in the US are now at their tightest level since the COVID-19 pandemic, when stay-at-home orders shuttered the global economy and sparked the steepest recession since the 2008 crisis, SocGen estimated.
That spells trouble in the financial realm, as tighter lending conditions have traditionally been followed by a higher percentage of defaults on speculative-grade debt, which are high-yield loans given to companies with lower credit.
“The current bank lending standards imply a rise in defaults to 8.4%, more than twice the long-run average and well above what current US high yield spreads imply,” strategists said in a note on Wednesday, advising global credit investors to shift to debt in Europe over the US.
Experts have been warning of the rising risk of corporate defaults since the failure of Silicon Valley Bank in early March – particularly within the commercial real estate sector, since small- to mid-sized lenders finance around 80% of all debt in the industry.
The real estate giant Brookfield Corporation has already defaulted on nearly a billion in commercial real estate debt so far this year. And large industry executives, like Apollo’s Marc Rowan, have warned that the second part of the banking crisis could show up through turmoil in the CRE space.