S&P Global Ratings Credit Research & Insights expects the Asia-Pacific (APAC) trailing-12-month speculative-grade corporate default rate to rise to 1.5% by September 2025, from zero in September 2024 (see chart 1).   Our economists anticipate growth in the region to slow somewhat this year and next (4.5% expected in 2024 and 4.2% in 2025, down from 4.9% in 2023), amid concerns about slower global demand and U.S. trade policy. Borrowing costs for U.S. dollar-based debt remain historically elevated. Any relief will depend on the Federal Reserve's interest rate trajectory since roughly three-quarters of outstanding rated debt among speculative-grade issuers in the region is U.S. dollar-denominated.

The current speculative-grade negative bias is at a multiyear low, and net rating actions have been positive over the past 12 months, helping to keep default rates low on the horizon. But risks remain.

Chart 1

In our optimistic scenario, we forecast the default rate could hit zero.   This scenario would be a continuation of recent trends, where the regional default rate has been zero in the 12-month periods ended August and September.

With the exception of China, emerging markets in APAC are seeing generally robust domestic demand and expanding exports. Although we expect regional growth to slow somewhat in 2025, potential growth support from fiscal policy by China--if effective--could reduce downside risks to growth next year. That said, uncertainties remain for global trade given the outcome of the U.S. election and possible implications for tariffs, though an impact may not be felt in the near term.

The rating distribution among speculative-grade issuers in APAC is at one of its strongest levels in the past few years, with 71% of issuers carrying a rating in the 'BB' category, which should limit default activity, all things considered.

In our pessimistic scenario, we forecast the default rate could rise to 2.5%.   In this scenario, Chinese growth could be slower than our already modest expectations, led by:

• Weaker consumer sentiment,
• A weaker property market,
• Entrenched deflation (which remains a risk despite recent stimulus initiatives), or
• Negative impacts from any new tariffs out of the U.S.

Spillover effects would occur regionwide and could hurt export-oriented sectors if domestic demand continues to struggle. For now, much remains uncertain, and it's likely any tariff impact on defaults would emerge either toward the end of our forecast horizon, or beyond it.

Although still healthy, lower-than-expected growth out of the U.S. is also a risk to APAC's growth. Expected interest rate cuts could also slow, particularly if inflation resumes as a result of prices rising from higher tariffs globally, or continuing fiscal pressures as governments in other regions keep spending and borrowing elevated.

The Region Escaped Some Recent Global Trends, But Not All

Financial markets experienced upheaval in early August after the release of the July nonfarm payrolls report in the U.S. failed to meet market expectations. However, this was less the case within emerging Asia. Unsurprisingly, equity markets reacted quickly to the news, but credit markets around the world also saw quickly widening spreads (see chart 2). This turmoil was arguably made worse by the unwinding of the yen carry trade, which has been difficult to quantify and track.

Chart 2

However, even if corporate bond spreads are historically low in APAC, financing risks remain. Like other regions, APAC is facing much higher yields than in the past decade. Despite some recent declines, yields on U.S. dollar- and euro-based bonds in secondary markets are still roughly as high as they were before the financial crisis (see chart 3).

Spreads and yields typically move in a similar direction, with some differences in magnitude. However, since early 2021, yields have been increasing while spreads have remained stable, or have fallen. This divergence widened further at the start of 2022, when the Fed began raising rates.

Ultimately, this widening gap in movement between yields and spreads shows that tight spreads are potentially misleading of the true cost of debt for borrowers. This could also demonstrate an understated vulnerability in fixed-income markets, which could see spreads widen quickly if more targeted (or fundamental) negative credit or economic events were to occur.

Chart 3

In other regions, the percentage of repeat defaulters has been relatively high in recent years (see "Overstated But Overdue: The Current Default Environment In The U.S.," June 5, 2024). These are often issuers that engage in distressed exchanges and subsequently default again. Currently, over 10% of U.S. speculative-grade issuers have previously defaulted.

But within APAC, only 4.1% of current issuers have previously defaulted (see chart 4). Fewer defaulters in APAC are going concerns, which could help keep defaults in the region comparably lower over the near term, all things being equal, given a smaller population of re-defaulters.

Chart 4

Bond Issuance Rebounds, But Not Enough To Ease Upcoming Maturities

We're seeing speculative-grade bond issuance recover in APAC this year, after two years of minimal activity (see chart 5). The 'B' and 'B-' new issuance this year totals just $862 million, but it's a break from two years of no issuance. On the higher end, 'BB' category new issuance this year through September totals $13.5 billion--well above the $6.3 billion in 2022 and 2023 combined. This has brought overall speculative-grade bond issuance through September to $14.4 billion from only $1.5 billion at the same time in 2023, and $3.8 billion in 2022.

Nevertheless, issuance remains well below historical norms for the year to date. However, we believe issuers may be tapping private and other onshore sources of funding to refinance debt as well, such as bank debt, or from direct lenders. This is something that has become more popular globally in recent years.

General market sentiment could improve as global rates fall in 2025, all things being equal. This should provide a constructive funding environment for speculative-grade issuers ahead, even if yields remain somewhat elevated relative to the recent past.

That said, uncertainties have risen as increased tariffs out of the U.S. become more likely, which could spur increased market volatility depending on their extent and that of any retaliatory tariffs from outside the U.S.

Chart 5

Other regions have seen even stronger rebounds in issuance so far in 2024, with much of it used to refinance upcoming maturities. However, speculative-grade maturities are a concern in APAC, as they remain elevated well beyond this year (see chart 6).

A few years ago, such a maturity wall would have translated into more refinancing risk, credit stress, and potentially defaults. However, speculative-grade issuers in the region have increasingly refinanced maturing notes with domestic bank loans or domestic bonds and reduced their reliance on refinancing needs in more volatile foreign currency capital markets.

Chart 6

A majority of outstanding speculative-grade debt is based in U.S. dollars (see chart 7). The dollar has strengthened over 7.6% since the start of 2022 (according to the Bank for International Settlements's broad basket real effective exchange rate) on higher yields, leading to rising local currency financing costs. That said, we've observed many rated companies hedging their U.S. dollar-denominated debt exposures more than during the Asian financial crisis, or even beyond current regulatory requirements (see "A Look At Why South And Southeast Asian Firms Are Standing Up To A Strong Dollar," May 15, 2024).

Beyond funding, some entities may also have exposures in their operating costs, though we don't expect this to be overly burdensome because many have more dollar-linked revenue than in the past. We expect risks associated with foreign exchange exposures will be largely manageable. Also, if central bank rate policies start to converge, as expected, this could help reduce some of the foreign exchange burden, and the dollar has seen some weakening in recent months ahead of Fed rate cuts.

Chart 7

Recent Credit Trends Remain Positive For Rated Entities

From a credit perspective, future speculative-grade default pressure is minimal in APAC, in our view. The four quarters ended Sept. 30, 2024, has been one of the most positive periods on record, with net rating actions at 8.7% (the percentage of upgrades minus the percentage of downgrades) and the net bias at a positive reading of 1.6%. The positive tilt to rating actions has been helped by four consecutive quarters of no downgrades into the 'CCC' or 'C' categories.

An increase in negative rating actions tends to precede a rise in defaults by two to three quarters. This was the case in 2009 and 2020, when the net downgrade rates were below -10%. During these years, the net bias was also more negative due to a much larger proportion of negative outlooks and CreditWatch negative relative to positive ones (see chart 8). In both years, defaults peaked around November/December after seeing the most negative credit trends two to three quarters earlier.

Chart 8

Given the lack of downgrades, particularly into the 'CCC' and 'C' categories, the overall proportion of the speculative-grade population within those categories is very low, which should also limit the number of defaults ahead (see chart 9).

Chart 9

The Asia-Pacific region is very large and diverse from economic, credit, and corporate perspectives. But a few characteristics are common among the region's speculative-grade entities, such as higher reliance on trade, commodities, and the high-tech sector.

In terms of where the lowest-rated issuers ('B-' or lower) are located, Australia leads, with 40% of this population. But after that, the remainder is fairly well distributed (see chart 10).

In the last few years, Chinese homebuilders have had the highest number of defaults, but a repeat of that looks less likely going forward. In fact, we estimate that Chinese homebuilders currently account for 1% of the speculative-grade population in APAC. Many that defaulted in the last few years have not reemerged or sought a new rating yet. This smaller contribution from a recently vulnerable sector also supports a lower default rate ahead.

However, this does not necessarily reflect the stress on the overall market when including unrated issuers, which may still experience elevated default pressure ahead (see "China Default Review 2024: Trough Before The Third Wave," April 23, 2024).

Chart 10

Appendix: How We Determine Our APAC Default Rate Forecast

Our APAC default rate forecast is based on current observations and on expectations of the likely path of the regional economy and financial markets.   In addition to our baseline projection, we forecast the default rate in optimistic and pessimistic scenarios.

We determine our forecast based on a variety of factors, including our proprietary analytical tool for APAC speculative-grade issuer defaults.   The main components of the analytical tool are economic variables (GDP, for example), financial variables such as corporate spreads, the U.S. yield curve (as a proxy global recession warning), and credit-related variables (such as negative bias).

In addition to our quantitative frameworks, we consider current market conditions and expectations.  Factors we focus on can include equity and bond pricing trends and expectations, overall financing conditions, the current ratings mix, refunding needs, and negative and positive developments within industrial sectors. We will update our outlook for the APAC speculative-grade corporate default rate after analyzing the latest economic data and expectations.

Regional definition

We define the APAC region as Australia, Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, Hong Kong Special Administrative Region of China, India, Indonesia, Japan, Republic of Korea, Macao Special Administrative Region of China, Malaysia, Marshall Islands, Mongolia, New Zealand, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam.

Special thanks to our colleagues for their insights and contributions: Christopher Lee, Chloe Wang, Charles Chang, and Xavier Jean.

Related Research

• Credit Conditions Asia-Pacific Q1 2025: Bracing For Volatility, Dec. 3, 2024
• Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon, Nov. 25, 2024
• How Would China Fare Under 60% U.S. Tariffs?, Nov. 17, 2024
• Asia-Pacific Credit Outlook 2025: Cutting Through The Noise, Nov. 13, 2024
• This Month In Credit: Back On Track (October 2024), Oct. 31, 2024
• Credit FAQ: Will China's Latest Stimulus Initiatives Achieve Lift-Off?, Oct. 25, 2024
• Where Are China’s Overinvestment Risks?, Aug. 7, 2024
• 2023 Annual Asia Corporate Default And Rating Transition Study, June 11, 2024
• Overstated But Overdue: The Current Default Environment In The U.S., June 5, 2024
• China Default Review 2024: Trough Before The Third Wave, April 23, 2024