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Credit quality improved throughout the year—marked by positive trends across the ratings spectrum on the back of a resilient economy. Favorable credit conditions enabled record bond and loan issuance, used for refinancing purposes. We expect pressures to continue easing (although unevenly) in 2025, resulting in a gradual decline in default rates from their 2024 peak. Yet next year is likely to be fraught with volatility and downside risks that could derail this base case.

What We're Watching

Even in a world of disruption, credit markets secured some substantiative stability in 2024 on the back of a generally resilient economy.

Financial and nonfinancial corporate upgrades outpaced downgrades in most regions. Looking ahead, the global net outlook bias (i.e., positive bias minus negative bias) has been improving across all areas of the rating spectrum and falling below its long-term average. The drop in negative bias was visible across sectors, and most prominently among issuers rated 'B-' and below. Investment-grade upgrades have outnumbered downgrades in every month but two this year.

This positive trend reflects the unfolding of an economic soft-landing scenario, supported by strong employment and consumption levels. Credit conditions have also been very opportune, with continuous spread compression and higher yields.

Refinancing has been a key driver for issuance—accounting for three-fourths of speculative-grade global issuance through September, as companies seek to stay ahead of upcoming maturities. Despite still-high interest rates and the influx of geopolitical stressors, global bond issuance has remained strong throughout the year—and is likely to rise by 17% in 2024, to roughly $9 trillion. Favorable credit conditions have enabled companies to reprice and extend maturities, alleviating short-term liquidity pressures for many lower-rated borrowers.

At the same time, year-end defaults are expected to fall around 5% below their 2023 totals—with default rates on or around their peak in the U.S. and Europe. However, such easing pressure may not be wholly representative of overall dynamics.

What We Think And Why

Looking at this year's ratings performance shows that indicators are also sending conflicting signals heading into 2025.

Even as the net outlook bias for issuers rated 'B-' and below has improved, defaults across U.S. and Europe remain elevated—propelled by an uptick in distressed exchanges among issuers in the lowest rating category, which we forecast will continue so long as interest rates remain high.

Distressed exchanges and selective defaults typically result in lower loss rates, reducing their economic impact. However, many distressed exchanges lead to repeat defaults, offering only short-term relief. These issuers often return to the 'CCC+' and below rating category, with repeat defaults concentrated among those with lower ratings.

Credit pressure is additionally building in certain sectors—namely chemicals; packaging and environmental services; high technology; metals, mining, and steel; and telecommunications. These four sectors have increased their negative bias (i.e., percentage of issuers with a negative outlook or on CreditWatch negative) since this point last year, and their negative bias are now currently higher than their long-term averages.

We have also observed regional-specific disruptions in certain sectors, particularly among European automakers, where trade disputes and environmental transitions could hamper revenues and profitability. Additionally, both U.S. and European commercial real estate (especially in the office sector) continue to face declining asset values, as borrowers contend with considerable refinancing risks and vulnerabilities related to interest coverage.

Nevertheless, improving credit quality, ongoing corporate deleveraging, and secondary market spread compression have positioned credit markets for a positive start in 2025. In our view, supportive debt markets and a soft-landing scenario are likely to result in default rates falling across both the U.S. and Europe by September 2025 to 4.83% and 5.03%, from current levels of 3.25% and 4.25%, respectively. Overall, we expect defaults to decline in 2025 across most regions—with the exception of Asia-Pacific, where we expect a slight rise driven by more idiosyncratic reasons rather than macro-credit influenced trends.

This further slowdown in the rate of defaults is likely to materialize at a more gradual pace than the previous increase, due to ongoing pressure on the lowest-rated borrowers.

We expect global nonfinancial corporate bond issuance to continue to remain strong into next year—buoyed by the ripple effects of central banks' interest-rate cuts on M&A activity, particularly in the second half of 2025.

What Could Change

S&P Global Ratings expects a soft landing for global economies next year as central banks gradually cut rates while pursuing their 2% inflation targets. We forecast U.S. GDP growth to slow gradually to 2% or below starting next year (consistent with a soft landing) before rising back to potential. The eurozone will continue its gradual recovery in 2025 to reach its potential growth rate. And China's growth will slow toward 4% as the U.S. tariffs weaken exports and investment.

However, if the rate descent disappoints relative to current market expectations—for instance, in a scenario where inflationary pressures are revived by the fiscal and tariff policies of the U.S. incoming administration—speculative-grade corporate issuers (and particularly those with inadequately hedged floating-rate debt) will likely be most affected by market shocks that drive up borrowing costs or limit access to funding. This could be compounded by a significant drop in global consumer spending—driven by rising credit delinquencies in the U.S., heightened inflation concerns in Europe, and declining confidence in China.

Against this backdrop, we expect 2025 to bring an increasingly tense geopolitical landscape and some uncertainties related to the tariff policy of the incoming U.S. administration, which could cause availability of credit to tighten and affect the upward momentum of credit quality. Escalating geopolitical tensions and uncertainties regarding the timing and extent of policy interest-rate cuts could lead to increased market volatility in 2025.

Writer: Molly Mintz

This report does not constitute a rating action.