The probability of U.S. corporate defaults has more than doubled in the past several years due to persistently high interest rates, while new data shows private credit may indeed have investment-grade level default risk, according to a new report from Moody’s asset management research team.
The one-year forward-looking probability of a U.S. publicly traded company defaulting reached 9.2% at the end of 2024, according to the report.
In recent years, the average risk of default peaked at 7.8% during the COVID-19 pandemic and then dropped to as low as 4% following the U.S. government’s aggressive policy response, which included the passage of the American Rescue Plan Act of 2021.
The report cites persistently high interest rates as the primary culprit straining credit quality for U.S. companies in 2025 despite strong economic growth, labor market strength and tight credit spreads.
The premise of the report is that while the current dominant narrative is that corporate credit is solid, it is a mistake to think about corporate credit as a monolith, said David Hamilton, managing director at Moody’s and head of asset management research, in an interview.
“If you were seeking to raise debt capital, there are a wealth of options out there now, whether it’s bonds, loans, private credit, you name it,” Hamilton said. “And because of that, you kind of have to look at this through multiple lenses, and that’s what we try to do in this study. So we look at the entirety of listed public companies to take the temperature of the market, and when you do that, the average across all these you see is something that doesn’t necessarily square with that dominant narrative.”
Moody’s research shows that while the universe of U.S. public companies has seen their probability of default more than double since 2021, high-yield companies are significantly outperforming and chalked up an average probability of 3.3% at the end of 2024, according to the report. The 5.9-percentage-point spread between all public companies and high-yield companies is the highest ever recorded by Moody’s.
“If you look at relatively smaller — let’s call it middle-market — predominately loan-financed companies, their risk is much higher (at 7.6%) than even high-yield bond issuers, which most people tend to think of as the representative risky issue because they’re highly levered,” Hamilton said. “The key, of course, is what’s driving that difference is sensitivity to rates and access to capital, so if you’re a high-yield bond issuer and you locked in at the time of when there was a lot of those refinance things happening after the pandemic, you’re largely inoculated from a lot of the effects that have accumulated in the years since.”
“Whereas if you’re paying floating (rates) and you’re smaller and can’t tap a $200 million or $250 million bond issue, you’re kind of stuck, right? So you actually see that in the numbers,” Hamilton said.
Also in the report, Moody’s asset management research team begins to explore how to measure the emergence of private credit, and that industry touting strategies as private “investment grade” strategies due to their strong underwriting.
At this point, Hamilton says that illiquidity concerns aside, private credit is behaving the way it should.
He and his team used publicly traded business development companies, with the idea that the average probability of default for a BDC would serve as a kind of proxy for the underlying credit performance of all the private loans in which the fund invests. A publicly traded BDC is a type of investment company that assists small and medium-sized businesses in accessing capital by pooling money from multiple investors to provide loans.
“We looked at publicly traded business development companies to see if we can take the temperature of what’s going on in private credit by looking at the credit risk of these BDCs,” Hamilton said. “What we found, and you see this is the data, is a lot of these funds aim for a BAA-type of rating because they want to cross that institutional investing hurdle, kind of investment grade while at the same time trying to provide the value of reaching too high in the ratings camp.”
What they found was that the average probability of default for 47 business development companies tracks relatively closely to the average probability of default for Baa-rated corporates, the question being: Do you “resemble” Baa in risk terms?
And the answer was yes, Hamilton said. The average BDC probability of default was tracked at 0.34% at the end of 2024, while the average Baa-rated probability of default was 0.26%.
The full report is available on Moody’s website.
