(Editor's Note: S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses--specifically with regard to tariffs--and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential and actual policy shifts and reassess our guidance accordingly (see our research here: spglobal.com/ratings).)
Key Takeaways
- We expect the global speculative-grade default rate to rise to 3.75% through March 2026, from 3.25% as of this March.
- This projection is based on our various regional default forecasts, which are all being influenced by the unfolding global tariff situation and the resultant risks and uncertainties.
- We believe that regardless of the outcomes of recent pauses, higher tariffs will be a staple of the global trade environment moving forward.
- For now, the main risk to our baseline assumptions is if current pauses ultimately result in noticeably higher tariff levels than are in place currently, which would have a significant direct and indirect impact on many speculative-grade borrowers and their industries.
S&P Global Ratings Credit Research & Insights expects the global trailing-12-month speculative-grade corporate default rate to rise slightly to 3.75% by March 2026 from 3.25% in March 2025 (see chart 1). This forecast incorporates only slight movements in default rates for the U.S. and Europe, alongside a rising default rate for Asia-Pacific (APAC). We expect defaults in developed markets to remain historically elevated at the end of the first-quarter of next year as a result of higher tariffs and the potential for increased uncertainty that could come as the negotiation processes continue this year.
There have been no defaults within APAC for an extended period, but we believe that will end over the coming months as pressures build from the deteriorating global trade environment and its potential to hurt consumer demand. Our prior expectations were for defaults to decline gradually for the remainder of the year. This forecast implies that defaults could rise again in the first quarter of 2026 as tariff strain builds over time.
Chart 1
Downside risks to the forecast include the possibility that current 90-day pauses will ultimately result in higher tariff rates than in effect currently. This could cause already weak consumer sentiment to decline further, for temporary bouts of inflation to cause central banks to hesitate cutting rates, and for increased market volatility to cut off access to funding for weaker-rated borrowers for a protracted time.
The direct effects of higher U.S. tariffs would be felt hardest and quickest by lower-rated issuers. The impact may not be uniform in speed or extent due to staggered levels of tariffs depending on sector (for example, higher tariffs for both Chinese exporters and on certain products like steel and aluminum).
When looking at 'CCC/C' rated issuers globally, their representation is mixed in terms of sensitivities to direct tariff impacts (see chart 2). While certainly the high proportion of issuers from consumer products could pose a risk for higher defaults as a result of higher tariffs, the equally high proportion of issuers from media and entertainment may be far less directly exposed.
Chart 2
And though early in the process, it may prove that exporting countries find alternate markets for their end-products outside of the U.S., lessening the direct impact. Nonetheless, we believe the indirect impact on global demand, and consumer as well as financial market sentiment, remains a key stress point that could push defaults up early next year, following an expectation so far for a gradual descent in defaults in 2025.
Despite two 90-day pauses in effect, negative rating actions (including negative outlook revisions and CreditWatch placements) have occurred as a result of current and proposed tariffs (see chart 3). The consumer products sector has become a focal point for credit risk already--leading the way with 10 negative actions with increased tariffs as a primary driver.
Chart 3
Limited market access, often accompanied by a quick widening of credit spreads, tends to occur during times of heightened uncertainty. This was the case during the 2007-2009 global financial crisis and COVID-19 pandemic, and happened again in April. This cut the otherwise strong momentum for global speculative-grade bond issuance that month (see chart 4). In April, there was only $22 billion of new speculative-grade bond issuance, easily the weakest month of the year and the worst April total since 2022.
However, for speculative-grade issuers, tariff distress didn't last long enough to severely crimp market demand for too long. May would see $55.3 billion, easily the strongest monthly total in 2025 thus far. A number of positive developments helped restore some level of confidence, but things are far from final and could yet deteriorate further.
For now, issuers are tapping markets and largely keeping ahead of pending maturities. In addition, there has also been a resumption of debt-funded mergers and acquisitions. For the moment, things are looking up. But we do believe--despite pauses and positive statements between negotiating parties--higher tariffs will likely be a reality (in addition to higher interest rates and souring consumer sentiment) that many speculative-grade issuers will need to face.
Chart 4
Related Research
- Global Tariff Tracker: Rating Actions As Of May 30, 2025, June 3, 2025
- The European Speculative-Grade Default Rate Could Ease Slightly To 3.6% By March 2026, May 23, 2025
- The U.S. Speculative-Grade Corporate Default Rate Could Reach 4% By March 2026, May 21, 2025
- The Asia-Pacific Speculative-Grade Default Rate Could Rise To 1.5% By September 2025, Dec. 8, 2024
This report does not constitute a rating action.
| Ratings Performance Analytics: | Nick W Kraemer, FRM, New York + 1 (212) 438 1698; nick.kraemer@spglobal.com |
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