Fitch Ratings‘ analysis of distressed and defaulted corporates between 2004 and Q1 2025 provides a comprehensive view of recovery patterns, default rates, sector vulnerabilities, and regional disparities.  

The research highlights the difficulties in recovery for lower-rated entities. Few distressed credits avoided default and the ones regaining non-distressed ratings mostly recovered to the lower end of the ‘B’ category only. Nearly half of distressed credits ultimately defaulted.  

The study also reveals a high rate of “false springs,” where initial upgrades in distressed ratings were followed by subsequent downgrades, emphasizing the volatility at these levels.  

You can read the full ‘Default and Distress Analysis’ report here. Please note that a Fitch Ratings account may be required to view the document.  

Here we summarize some of the key research findings: 

Limited recovery from distress 

• Only 16% of distressed credits recovered to a non-distressed level without defaulting, with most recoveries capped at the lower end of the ‘B’ rating category. This suggests that a meaningful turnaround from distress is rare. 

• Nearly half of all distressed credits defaulted, while another 10% remained in distress (‘CCC’ to ‘C’). 

Default rate patterns and drivers 

• Default rates rise as the ratings descend on the scale.  

• The average annual corporate default rate stood at 7%, with speculative-grade entities (‘CCC’ to ‘C’) leading defaults across all sectors. 

• External pressures such as the global financial crisis, the Covid-19 pandemic, and China’s property downturn were pivotal in driving downgrades to distressed levels. 

• Fitch Ratings expects a rise in high-yield default rates in 2025, due to a weaker macroeconomic outlook, ongoing trade war uncertainties and an anticipation of higher-for-longer interest rates which are likely to materially affect issuers at the lower end of the rating spectrum. 

Sector vulnerability and default trends 

• The homebuilding, retail, and transportation sectors experienced the highest default rates, driven by sector-specific shocks such as the pandemic, global financial crisis, and oil price collapse. 

• Overall, corporate default rates averaged 7%, trailing sovereigns (9%) and structured finance (17%) 

Regional disparities in distress and default 

• Latin America exhibited the highest distress and default rates globally, with Brazil and Mexico accounting for most regional defaults. 

• APAC, primarily China, faced high default rates in property and homebuilding sectors due to severe liquidity pressures and governance issues. 

• North America saw significant numbers of distressed ratings, but with a comparatively lower distress rate of 13%. 

Governance failures in defaults 

• Governance factors contributed to 40% of investment-grade defaults within five years of downgrade, with APAC and Latin America being most affected. 

• Examples included complex group structures, opaque funding and weak board control. 

  For a deeper dive into the research, you can access the full ‘Default and Distress Analysis’ report here.