The Growing Divide in High Yield

The Growing Divide in High Yield

09/02/2026 05:25 AM

The quality of the public high yield market has improved over the past several years, at least by conventional ratings measures. A larger share of the public high yield market is now rated BB, while some of the riskier corporate borrowing activity has increasingly taken place in private credit and leveraged loan markets. That shift can make the public market look healthier without reducing the overall corporate credit risk by reallocating where that risk resides.

This month, we examine one-year KRIS default probabilities for the 3,000 largest publicly listed U.S. companies across the S&P fixed income rating categories. Three snapshots are considered: December 2019, December 2025 and August 2026. The objective is not to test whether ratings are correct, but rather to examine how our modeled default risk has changed within and across rating groups.

What changed inside the broad rating categories

At the aggregate level, the picture is relatively (and surprisingly) stable. The results are shown in Table 1 and Figure 1 below. The equal-weighted 1yr PD for the investment grade (IG) companies was 12.8 basis points (bps) in August 2026, very close to 13.1 bps in 2019. For high yield (HY) companies it declined from 115.8 to 96.7 bps. The (equity) market cap-weighted measures changed even less: investment grade rose from 7.7 to 8.2 bps, while high yield moved from 24.3 to 24.1 bps.

The unrated group exhibited more noticeable changes. Its equal-weighted PD increased from 40.4 to 59.8 bps, while its market-cap-weighted PD rose from 12.7 to 19.6 bps. The data shows that while rated universe credit risk profile remained stable at a broad category IG/HY level, the unrated group deteriorated. It is worth noting that unrated companies are typically much smaller. The average unrated company is much smaller, with an average market capitalization roughly 60% that of the average HY company and only about 4% that of the average IG company.

Figure 1: Average 1-Year Probability of Default by Rating Category (values in bps)

Table 1: Average 1-Year Probability of Default by Rating Category (values in bps)

Market concentration changes explain the stable aggregate metrics

The number of companies in each broad category changed little, but the distribution of equity market capitalization did not (see Table 2 below). Investment grade companies accounted for 84.1% of the sample's market capitalization in August 2026, up from 76.6% in 2019. Over the same period, the high-yield share fell from 8.4% to 5.1%, and the unrated share declined from 15.0% to 10.9%. Thus, while the risk of non-rated companies increased, it was masked by increase in share of the IG.

A relatively small group of very large, low-PD companies exerts increasing influence on the market cap-weighted results. Stable aggregate PDs therefore should not be read as evidence that credit conditions are uniformly benign. They are partly a consequence of where equity value has accumulated.

Table 2: Company Count and Share of Equity Market Capitalization

The more interesting development is within the rating categories

The broad IG and HY averages conceal substantial movement at the individual rating levels. The relationship between ratings and KRIS PDs is not perfectly monotonic. In the latest snapshot, BB+ companies had an average one-year PD of 22.2 bps, below the 26.8 bps for BBB-. The same inversion appears in the market cap-weighted measures, at 13.7 bps for BB+ and 15.7 bps for BBB-.

That result should not be interpreted as proof that BB+ debt is generally safer than BBB- debt. Ratings and KRIS PDs measure credit risk differently, and the composition of each bucket matters. It does, however, show why the investment grade boundary is not a substitute for issuer-level analysis. Some companies immediately below the boundary have stronger modeled risk profiles than some companies immediately above it.

Dispersion within BBB has also widened. In 2019, the equal-weighted PD for BBB- companies was 2.1 times the BBB+ level. By August 2026, the ratio had increased to 3.4 times. On a market cap-weighted basis, the ratio rose from 1.3 to 1.7. The lower end of the investment grade is therefore carrying materially more risk than the headline BBB label suggests.

High yield shows a similar split. BB improved materially relative to 2019, with its equal-weighted PD falling from 58.4 to 25.7 bps. BB- moved the other way, increasing from 57.8 to 79.7 bps. B- is especially notable: its equal-weighted PD was lower than in 2019, but its market cap-weighted PD rose from 46.3 to 126.3 bps. That combination suggests that risk became more concentrated in the larger companies within the bucket. CCC tells the reverse story, but with very few companies in this category the results can be quite noisy.

The key finding here is that the middle of the credit spectrum has become a lot more differentiated. The public HY market increasingly resembles two distinct markets: a stronger BB segment and a more stressed lower-rated segment.

Table 3: Average 1-Year PD by Detailed Rating Category (values in bps)

Refinancing has reduced the near-term wall, not the underlying burden

The market backdrop helps explain why aggregate HY PDs remain contained. According to SIFMA, the U.S. corporate bond issuance reached $1.681 trillion through July 2026, up 26.9% from the same period a year earlier. The 2026 so far is on track to have the highest issuance on record. Strong issuance allowed many borrowers to address near-term maturities rather than face an immediate refinancing cliff.

Another data point supporting this theory came from S&P Global Ratings that reported brisk issuance has shifted the peak year for global HY nonfinancial maturities to 2031 (compared to 2028 where it stood in the beginning of this year). That is a meaningful reduction in near-term rollover risk. However, it is not the same as balance sheet repair. Refinancing extends maturities, but borrowers will likely face higher coupons due to elevated interest rates, making leverage more difficult to reduce.

The KRIS results are consistent with that distinction. The public HY market appears to be stable for now. The areas of improvement are concentrated in the higher quality part of the market, while lower-rated borrowers are showing further deterioration. The refinancing market has bought time for many of the borrowers. Whether that time produces deleveraging will depend on cash flow, interest coverage, and the ability of weaker issuers to refinance again on sustainable terms.

Executive Summary

• Public high yield looks better in aggregate than it did in 2019, but the improvement is concentrated in higher quality and in the largest issuers.
• The BBB boundary has become less informative: BBB- PDs widened materially relative to BBB+, and BB+ issuers appear less risky than BBB- issuers in the latest snapshot.
• Stress remains concentrated in more speculative (BB- and below), and the unrated issuers. Aggregate stability should not be mistaken for uniform strength.
• Refinancing has pushed out maturities and reduced immediate rollover risk. It has not necessarily reduced leverage or debt-service pressure.

Sources and methodology notes

Sources: SAS KRIS, S&P Global Ratings, S&P Compustat, and SAS analysis.

Methodology: Credit ratings are sourced from S&P Global Ratings. Market capitalization data are sourced from S&P Compustat. One-year probabilities of default are from KRIS. Calculations and analysis are by SAS.

Credit Conditions Summary - Top 3000 US Firms

Conditions among the largest U.S. firms were mostly unchanged in August. Both the market-cap-weighted and median measures of default risk declined, continuing the pattern of resilience that has characterized much of 2026. However, the gap between the two measures remains significant, indicating that the largest firms continue to experience substantially lower credit risk than the typical company in the market.

Figure 2: Market Cap-Weighted Cumulative Default Probability - Top 3000 Companies in the US

Figure 3: Median Cumulative Default Probability - Top 3000 Companies in the United States

Table 4: Market Cap-Weighted Average 1-year Default Probability (Top 3000 Firms in the United States)

Table 5: Median 1-year Default Probability (Top 3000 Firms in the United States)

Why KRIS PD forecasts matter now. Market prices can remain calm even as underlying risk becomes more concentrated, making model-based, issuer-level signals increasingly important. KRIS default probabilities provide daily, issuer-level signals that help make this bifurcation visible: pinpointing names where refinancing pressure, equity-volatility shocks, or weakening coverage metrics are emerging even when credit spreads do not move. Used alongside market spreads and fundamental analysis, PDs help identify risks that are not yet fully priced, providing actionable early-warning signals.

Appendix

Table 6: Riskiest Rated Companies Based on 1-year PD

Figure 4: Expected Cumulative Default Rates

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Editorial contact: Stas Melnikov - [email protected]