"There is a risk of one now because of the colossal amount of fiscal and monetary stimulus pumped into the global economy in recent years – first following the global financial crisis, and later during the pandemic crisis.
"This liquidity has inflated asset prices and driven speculation, resulting in the surging inflation we see today," he added, saying whether a recession is credit‑driven or inflation‑driven was an important distinction to make.
Della Vedova predicted the damage from an inflation-driven recession would be more modest for corporates.
"In the inflation‑driven recession of 1982-83, when the Fed hiked its policy rate to 20 per cent, S&P 500 Index profits fell by 18 per cent.
"In the 1973-74 inflation‑driven recession, when the interest rate reached 13 per cent, profits also fell by 18 per cent. This contrasts sharply with the GFC and dotcom crash, when profits fell by 49 per cent and 25 per cent, respectively."
2 Stronger balance sheets
Many corporates entered 2022 on robust fundamentals, with high cash ratios and low debt, Della Vedova said.
In addition, bond‑issuing firms were able to benefit from attractive funding conditions to push out maturity profiles.
According to Della Vedova, just 1 per cent of the debt of both US and European high yield firms will mature this year, with a relatively small amount of debt maturing in 2023.
The bulk of the "maturity walls of high yield issuers will come in 2025 or later, indicating balance sheets are strong," he said.
Benbow agreed companies' balance sheets were generally strong.
“Many companies have termed out their balance sheets, resulting in few near-term maturity wall concerns," he said.
"The volume of US high yield maturities in 2022 and 2023 is relatively low, which should allow companies sufficient flexibility to manage their balance sheets and help to minimise default rates in the event of an economic downturn in 2023."
He added: “Fundamental improvement continues to be reflected in rating agency actions as upgrades (rising stars), continue to outpace downgrades (fallen angels).
“Solid fundamentals coupled with rating upgrades have resulted in one of the highest-quality high yield markets in decades. Within the Bloomberg US Corporate High Yield Index, BBs are at all-time highs while CCCs are below historical averages and lower than 2008."
3 There has just been a credit cycle
Covid saw a number of businesses default already.
In 2020, default rates among US high yield energy firms reached almost 30 per cent, according to Della Vedova, while debt restructurings were popular among European retail firms.
This has helped to separate the wheat from the chaff, meaning it is more likely firms that have weathered one storm will be able to weather the next, according to Della Vedova.
"Those with the potential to survive and thrive beyond a crisis tend to be well supported by sponsor investors. Companies with little prospect of long‑term success are typically allowed to go bust."
