In 2022, default rates in the high yield segment of developed markets will turn out to be historically low. According to experts at UBS Asset Management, the trend this year will be for issuers to upgrade from high yield to investment grade. Despite this constructive outlook, certain sectors may experience a deterioration in the ratio of rising stars to fallen angels, they argue in the paper ‘2022 Default Study – A story of opposites’.
With a default rate of less than 1%, the outlook for European high yield is the best, followed by US (less than 2%). “In Developed markets, we expect a reversal of the uptick in fallen angels that occurred in 2020, especially in sectors such as Autos, Energy and TMT, triggered by the COVID-19 pandemic. Although rising stars were noticeably absent that year, there was a modicum of hope in 2021 as evidenced by the charts on the right. We believe this is an important inflection point that sets us up for a strong upgrade cycle and a favorable rising star to fallen angel ratio in 2022.
The reasons for this optimism, according to the experts, are an improvement in cost control and the balance sheet, rising consumer spending, a low need for additional capital and the recovery of commodity prices.
Despite this constructive outlook, certain sectors may experience a deterioration in the ratio of rising stars to fallen angels, the experts say. “As competition intensifies and margin compression is exacerbated by high inflation, Investment grade rated European Supermarkets are notable and in Europe, within utilities, we expect certain solid A-rated issuers to migrate to mid -BBB ratings as they pursue shareholder friendly activity at the expense of maintaining their pristine ratings.”
According to the report defaults of Asian (ex-Japan) High Yield is expected to be at approximately 15%. “The real estate sector is an outlier at a 28% expected default rate, mostly emanating from China. Our view is credit losses from potential defaults within the sector are already largely reflected in current pricing.” Emerging Market Corporate defaults are expected to be approximately 3%: “Within EMD corporates, we expect Financials to potentially be the largest contributor to total defaults, due in part to the possibility of stress on the Turkish banking system that could impact some of the smaller and weaker Tier-2 banks.”
Here you'll find the complete ‘2022 Default Study – A story of opposites’ from UBS Asset Management.