Archive · 13 Sep 2025
Citi: Default Rates Misleading Due to Debt Restructuring
Imagine companies are having trouble paying back their loans.
Instead of just declaring they can't pay (a default), some companies are swapping old debt for new debt with different terms.
This is like getting a new deal to pay later.
Citi says these new deals are happening more often than regular defaults.
Because of these new deals, the numbers that show how likely companies are to fail (default rates) don't tell the whole story anymore.
It is harder for investors to know how risky it is to invest in the company.
One way this happens is when companies swap debt and give better deals to some investors.
This can make it seem like the market is doing better than it actually is.
Citi analysts say default rates are harder to predict due to debt restructuring.
Distressed exchanges outnumber traditional defaults.
Distressed exchanges inflate default rates, making risk assessment difficult.
Bloomberg index default rate is steady at 2.6%, while Moody's is at 3.9%.
Saks and Tropicana are examples of companies restructuring their debt.
- Who
- Citi analysts Michael Anderson and Steph Choe
- What
- Default rates of bonds and leveraged loans are becoming harder to predict as companies restructure debt, making it difficult for investors to accurately assess risk.
- When
- By end of July 2024
- Where
- N/A
- Why
- Because more companies are restructuring debt through distressed exchanges, which inflate default rates.
- Main Issue
- Default rates are inflated by distressed exchanges
- Distressed Exchanges vs. Defaults
- Distressed exchanges outnumber traditional defaults by 3:1
- Bloomberg Index Rate
- 2.6% (steady)
- Moody's Default Rate (July 2024)
- 3.9%
- Example: Saks Debt Exchange
- Non-participants face lower debt ranking and lost safeguards
- Example: Tropicana Deal
- Blocked non-participating firms from selling debt, offered financing