Corporate America Remains Creditworthy

Two automotive sector bankruptcies last month are fueling concerns over Corporate America’s credit health. While some admit these aren’t exactly huge, the fear is the two are just the tip of the iceberg. But credit markets—the most sensitive to default risks—indicate to us they are likely isolated incidents. When in doubt, we suggest you trust the market.

On September 10, subprime lender and auto dealership Tricolor Holdings filed for bankruptcy as its business model—selling and financing used cars to low-income and undocumented immigrants—collapsed. This made nary a ripple outside select financial headlines, perhaps due to the scope ($1 billion in liabilities spread over 25,000 creditors) and the niche market.

Then late last month, auto-parts supplier First Brands Group declared bankruptcy, too, owing more than $10 billion, with $800 million of it unsecured and another $4 billion owned by various investment firms and funds through collateralized loan obligations (CLOs). With two “canaries in the coal mine” going belly up, financial headlines have now shifted into a higher gear, offering many other colorful metaphors.^[i] They see “more cockroaches” and the private credit industry’s “chickens coming home to roost.”^[ii]

So are the dominoes set to fall in a chain reaction leading to widespread financial crisis? We doubt it. When it comes to such concerns, perspective is always in order. That can be hard to get regarding privately held companies and the private credit firms who lend to them. But there are ways to measure credit system distress more broadly using market-based tools, like high yield default rates.

While high yield (or “junk”) debt and subprime lending cater to different markets—corporations and individuals, respectively—there is considerable overlap between the macroeconomic factors driving riskier borrowers’ financial circumstances and those lending to them (who by definition have lower standards). Hence, high yield and subprime default rates typically track each other closely. As Exhibit 1 shows through September’s end, high yield bonds’ default rate is just 1.2%, well below its 4.0% historical average.

Exhibit 1: US High Yield Bond Default Rate Remains Below Historical Average

Source: BofA, as of 10/16/2025. Reprinted by permission. Copyright © 2025 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided “as is” and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

Now, there are pockets of weakness. Exhibits 2 & 3 show small cap companies’ default rates top large caps’, while private companies’ default rates exceed publicly listed equities’. But this shouldn’t shock you. Smaller companies normally present a greater credit risk, since they generally have fewer resources to draw on when the going gets tough. In some cases, that applies to private firms, too. Because their reporting requirements are laxer, they don’t experience the same glare of scrutiny as public ones.

Exhibit 2: Small Caps Have Higher Default Rates Than Larger Caps

Source: BofA, as of 10/16/2025. Reprinted by permission. Copyright © 2025 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided “as is” and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

Exhibit 3: Private Companies Have Higher Default Rates Than Publicly Listed Ones

Source: BofA, as of 10/16/2025. Reprinted by permission. Copyright © 2025 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided “as is” and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

So beyond Tricolor’s and First Brands’ anecdotal evidence, markets reflect the tighter credit conditions in the areas these companies operate in. Smaller, privately held businesses are having a tougher go. But that isn’t anything “hidden,” as some claim.^[iii] Their risks are well known and pored over by investors who are very aware of industry trends and default risks. After all, they are the ones with the most to lose—their bread and butter is credit analysis and due diligence.

Overall, credit risks remain minimal. When investors perceive rising default risk (usually ahead of economic turning points or when major industries face severe headwinds, like low oil prices in 2015), they demand more yield to hold high yield or corporate bonds versus Treasurys. The difference between those yields (i.e., the credit spread) widens as a result. Today, we see little to none of that. Exhibit 4 shows high yield credit spreads—which tend to lead defaults by around eight months—are near record lows. Markets are pricing in a largely benign credit environment.

Exhibit 4: Benign High Yield Credit Spreads Lead Bond Default Rates

Source: BofA, as of 10/16/2025. Reprinted by permission. Copyright © 2025 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided “as is” and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

The same holds if you look at broader corporate credit markets, as Exhibit 5 illustrates. Like high yield credit spreads, investment grade corporate bonds’ (whose market is roughly five times the size as “junk”) are hovering near record lows as well. This implies investors see little evidence suggesting defaults are likely to soar in the near future. By the same token, though, it also means you are receiving little compensation for corporates’ added risk over Treasurys.

Exhibit 5: Investment Grade Credit Spreads Near Record Lows, Too

Source: BofA, as of 10/16/2025. Reprinted by permission. Copyright © 2025 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided “as is” and none of BAC or any of its affiliates warrants the accuracy or completeness of the information.

Lastly, in the grand scheme of things, though headlines make out Tricolor’s and First Brands’ bankruptcies as huge splashes, they are at most ripples in credit markets. A billion or $10 billion across many creditors isn’t a big deal in this $30 trillion economy—much less for its more than $100 trillion in total loans and debt securities outstanding, the vast majority of which hasn’t defaulted and isn’t about to.^[iv] We see all the ruckus as a false fear—bullish for markets.

Hat Tip: Fisher Investments Research Analyst Wei Zhang.