Report
What effect will prevail in determining default rates? The conflict between corporate credit conditions and corporate profitability
In both the United States and the euro zone, corporate credit conditions are becoming very restrictive in early 2023. This trend is usually associated with a rise in corporate default rates (we look at the High Yield default rate). But we also see that corporate profit margins are very high in the United States, and are picking up rapidly in the euro zone. This raises the question of whether high or rising profit margins can offset the normally negative impact of tighter credit conditions on default rates. We find a significant effect of both bank credit conditions (restrictive conditions drive up the High Yield default rate) and corporate profit margins (high profit margins drive down the High Yield default rate). These two opposite effects are of roughly the same order, which means that their combined effect on the High Yield default rate is very small.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
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