The Fed may be done hiking interest rates, but get ready for more corporate defaults in 2024, Fitch Ratings says

• Despite the likely end of Fed rate hikes, corporate defaults will rise next year, Fitch Ratings says.

• The central bank will lower interest rates by 75 basis points, the rating agency predicts.

• Meanwhile, slower economic growth will push high-yield bond defaults to 5.0%-5.5%.

Corporate defaults will rise next year in both the US and the eurozone as the impact of tighter central bank policy will continue to work its way through the economy, Fitch Ratings cautioned.

The agency expects a much shallower Federal Reserve pivot than what US markets are forecasting. It projects that interest rates will fall by 75 basis points through next year, taking the Fed Funds rate to 4.75%.

But despite hopes for a pivot from central banks around the world, high borrowing costs will continue to be a burden on corporations through 2024.

“Stressed bond and loan issuers appear increasingly operationally challenged, generate low or negative [free cash flow], and/or cannot organically grow EBITDA to reduce high debt burdens,” Fitch said in a report released Wednesday.

Since the end of 2022, total 12-month defaults among US bond and loan issuers jumped from 1.6% to 3.04% for leveraged loans, and 1.35% to 2.99% for high-yield bonds.

Through October, the year has been marked by 127 corporate debt defaults, 13% above the five-year average, as borrowing costs have come close to tripling for some firms compared to prior years.

But in 2024, defaults could rise to a rate of 3.5%-4.0% for leveraged loans, Fitch estimates. It expects high-yields bond defaults to reach 5.0%-5.5%, over six times the default rate among all such issuers in 2021.

Zombie firms, illustrated by WeWork’s bankruptcy this year, are especially vulnerable, given their lack of cash on hand to handle borrowing needs.

“The higher default rate expectations for 2024 reflect ongoing macroeconomic headwinds, including the impact of still high interest rates and a slowdown in the…