Credit stresses are growing, and borrowers will need to adjust to a new playing field in which financing conditions could become even tighter; near-term relief seems unlikely, as all-in borrowing costs look set to stay elevated, investors become more cautious, and U.S. GDP growth looks set to slow, S&P Global Rating said in a report titled "Credit Conditions North America Q1 2024: A Cluster Of Stresses," published Nov. 28, 2023, and a supplementary slide deck released today.

As higher interest rates and inflation erode financial cushions, more subdued business investment and/or a sharper pullback in consumer spending could lead to a recession, causing more credit stress. Consumers are already showing signs of weakness. American households (especially in the lower-income cohort) have been tapping more into their credit cards, with delinquencies on the rise. Meanwhile, mortgage-payment shocks are pushing Canada's household debt-service ratio close to its historical high.

S&P Global Ratings' proprietary Credit Cycle Indicator suggests that near-term stresses could give way to a credit upturn in 2025. The North America CCI looks to be rising from its trough reached in the fourth quarter of 2022; and, historically, the CCI tends to lead credit developments by six to 10 quarters. But there will likely be lingering effects on defaults and nonperforming loans from the buildup of debt leverage and asset prices during the pandemic.

Downgrades continue to outpace upgrades, and the net outlook bias, indicating potential ratings trends, for North American corporates was at negative 10.9% as of Nov. 15. This is a worrisome level given that we rate 20% of the region's corporates 'B-' or below. Consumer products, health care, and telecom are the sectors with the highest negative bias.

Defaults are rising, and credit quality could erode further. S&P Global Ratings Credit Research & Insights expects the U.S. trailing-12-month speculative-grade corporate default rate to reach 5% by September—above the 4.1% long-term average. If, as we expect, unemployment rises and discretionary spending declines, consumer-reliant sectors, which make up roughly half of borrowers in the 'CCC/C' categories, will suffer most.

Higher-for-longer rates are adding to debt-servicing costs, pressuring cash flows and interest coverage of weaker, lower-rated borrowers. And while investment-grade issuers have been able to mitigate cash interest payment increases by paying off debt, this isn't sustainable as maturities accumulate. Meanwhile, many speculative-grade issuers are restructuring their capital structures. This has resulted in more than a two-fold increase in 'D' and 'SD' ratings year-to-date compared with 2022 or 2021.

Issuers have taken steps to address near-term maturities, trimming speculative-grade corporate debt due in 2024 by 34% over the past year, but speculative-grade debt coming due rises through 2028, and escalating maturities will add pressure to issuers' financing needs in coming years. Lower-rated borrowers may feel more severe liquidity strains if approaching debt maturities coincide with a period of challenging financing conditions.

This report does not constitute a rating action.

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