Where are we in the credit cycle? 2024 Outlook

From Average to Stressed Scenario for 2024: Preventing the risks 

Based on the 50 Years of Research of Edward I. Altman, Professor of Finance, Emeritus, at New York University’s Stern School of Business and a co-founder of Wiserfunding.

Edward I. Altman, a seasoned expert of credit cycles since the 1970s, observed the conclusion of the Benign Credit Cycle that began in 2010, transitioning into an Average credit risk scenario by 2023. Looking ahead to late 2024, there is a concern of progressing towards a Stressed Scenario, especially if unexpected events such as banking crises or geopolitical tensions materialise. This could lead to a significant increase in non-financial corporate defaults, potentially reaching 8-10%.

2023 Shift: From Benign to Average Credit Risk 

As we reflect on the credit risk landscape in 2023, it’s clear that we navigated a period marked by shifting dynamics. Edward I. Altman’s analysis points to a transition from a Benign Credit Cycle to what he terms an Average scenario. Despite resilient GDP figures and economic stability in the latter half of the year, the spectre of increased corporate distress loomed large. The High-Yield Bond market saw a notable uptick in default rates, reaching 3.4%, signalling a departure from previous years of relative calm. This trend was mirrored by a surge in Chapter 11 bankruptcy filings, underscoring heightened vulnerabilities among leveraged corporates. While economic fundamentals remained robust for many firms, concerns lingered over potential catalysts, such as sector-specific crises or broader economic downturns, that could tip the scale towards a Stressed Scenario by year’s end. 

Market Dynamics in 2024 

Early 2024 reflects a critical juncture in the credit cycle, with indicators suggesting a shift towards average credit risk scenarios after a prolonged period of benign conditions. Despite ongoing economic uncertainties, particularly regarding inflation and interest rates, late 2023 GDP resilience tempered some concerns but did not fully mitigate rising corporate distress. Notably, early 2024 has seen a significant uptick in corporate bankruptcies and leveraged loan defaults, surpassing levels seen even during the initial impacts of the 2020 pandemic. 

Altman’s forecasts for 2024 cautiously anticipate increased default rates across high-yield bonds and leveraged loans, potentially slightly exceeding historical averages. This outlook is supported by observed trends in required yield spreads, distress ratios, and recovery rates, which collectively indicate heightened investor caution amidst strong stock market performance and sustained corporate revenue growth in select sectors. However, uncertainties persist, particularly regarding liquidity in the risky debt market, which remains volatile and sensitive to external shocks such as recent banking crises and geopolitical tensions. 

Looking ahead, the credit cycle’s trajectory appears poised for further scrutiny, influenced by evolving Federal Reserve policies and global economic conditions. The interplay between credit cycle indicators and broader economic cycles underscores the potential implications of any economic slowdown or recession in shaping credit market dynamics throughout 2024. Therefore, while current conditions may be labelled as average compared to recent years, ongoing monitoring and adaptive risk management strategies remain essential to navigate potential shifts towards more stressed credit environments. 

Download the summary of the study in PDF here: includes graphs and indicators.

How would a change in the credit cycle impact the risk profile of your portfolio? 

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