“With US tariffs and trade uncertainty unsettling global commerce in April, credit conditions have deteriorated” since the beginning of the year, the analysts wrote. The group includes US non-financial corporates with a Moody’s rating at or below the highly speculative Caa1 rung or with a higher B3 rating but are at risk of a downgrade.
Beauty products company Conair Holdings and brake kit company Power Stop are among companies Moody’s downgraded further into junk in the second quarter, given “significant pressure on their earnings and cash flow from high tariffs on goods sourced from China and other countries,” according to the report.
With market volatility, the number of companies that defaulted also increased last quarter compared to the prior period.
More than four times as many companies moved off the highly speculative list because of a default than companies that moved off the list via an upgrade, according to Moody’s. Most were technology companies, though Moody’s expects companies within the consumer products sector to see more defaults in coming months.
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Distressed debt exchanges remain the leading type of defaults, according to Moody’s. Companies typically propose distressed exchanges — a kind of restructuring agreement — to avoid bankruptcy, improve liquidity, reduce liabilities and manage upcoming debt maturities, the ratings firm said.
Private equity-owned companies, which comprise 76% of those on Moody’s highly speculative list, opt into distressed exchanges more frequently than non-PE owned businesses.
“We anticipate this trend of out-of-court debt restructuring will persist throughout the year, given that PE-owned companies make up a significant portion of our distressed debt population,” the analysts wrote.
Facing liquidity challenges, upcoming maturities and high interest rates, Moody’s expects private equity firms to “leverage every available option” to avoid bankruptcy, which would erode their equity stakes, according to the report.
