Corporate Credit Risks Grow as Rate Cuts Stall and Floating-Rate Borrowers Struggle

U.S. corporate credit looks solid, with strong blue-chip balance sheets and high-yield spreads around 275-285 basis points, yet a growing divide separates resilient investment-grade firms from leveraged borrowers dependent on floating-rate financing. The Federal Reserve has kept its benchmark at 3.50%-3.75% for five meetings, with some policymakers favoring a hike, undermining expectations of continued rate cuts through 2026.

Simultaneously, yield increases in Japan, the UK, France and Germany, plus inflation pressures from the Iranian war, are tightening global financing conditions. While speculative-grade default rates sit between 3.5% and 4.3%, many distressed issuers are avoiding Chapter 11 through debt-for-equity swaps and other exchanges, which rating agencies count as technical defaults. S&P Global Market Intelligence recorded 372 bankruptcies in the first half of the year, the most since 2010, especially in consumer discretionary, healthcare and technology. With trillions of debt issued at 3%-4% coupons now needing refinancing at 7.5%-9.5%, companies with weak interest coverage risk breaching the 1.0× EBITDA-to-interest threshold, prompting restructurings.