Defaults: Tracking the Persistent ‘Left Tail’

Research evidence excerpt

Defaults: Tracking the Persistent ‘Left Tail’

Goldman Sachs Global Credit Trader

In addition to these factors, oil prices have resumed their climb following the recent

re-escalation of geopolitical tensions in the Middle East, and our commodity strategists

see upside risk to their forecasts. While still off the recent peak levels, this incremental

climb in commodity costs may pressure the margins of sectors and firms heavily reliant

upon commodity inputs. On top of that, our European economists expect a second ECB

rate hike in September. Intermediate and long-end sovereign yields across the US and

Europe continue to hover at the high-end of the historical range, placing incremental

pressure on the cost of capital for corporate borrowers. And credit markets globally are

digesting a significant amount of AI-related supply, which has translated into more

visible spread widening in recent weeks.

While we view this backdrop as manageable for the majority of issuers in the leveraged

finance universe, it has two important implications to our existing views. First and

foremost, while our forecasts already call for some modest spread widening, we now

view the risks to our spread targets as firmly titled towards more meaningful widening.

Second, the combination of higher input costs and incrementally more expensive debt

borrowing further increase the pressure on the most vulnerable firms in the so-called

‘left tail.’

We Raise HY Default Forecasts in the US and Europe

The incremental pressures facing the weakest borrowers warrant a modest upward

revision to our existing default forecasts. That said, we do not view this as a broad-based

deterioration in credit quality.

The US HY 12-month trailing, issuer-weighted default rate, including distressed