(Bloomberg) -- The two-decade run of low levels of corporate defaults is over, with the jump in interest rates set to increase the number of borrowers failing to repay debts, according to analysts at Deutsche Bank AG.

Going forward, default rates will rise to higher levels, analysts at the German lender wrote in a note published Monday, even if a big surge may still be avoided.

“For 40 years, virtually all fixed-rate borrowers across the economy could refi at a lower rate than they’d previously achieved,” Deutsche bank analysts including Jim Reid and Steve Caprio wrote in the annual piece of research. “This changed after 2022, but the full impact could still be slow to be felt. So there is perhaps a ‘boiling frog’ analogy here where the market doesn’t notice it, until it does.”

Central bankers’ moves to raise rates to combat rising prices has made life harder for many riskier companies by forcing them to spend more to borrow. That’s led to an uptick in defaults around the world, after years of easy-money conditions when very few firms failed to repay their debts. 

Many are hoping for markets to return to that low-default rate era, but some, including Deutsche Bank, doubt that the next few years will be as serene.

Maturity Wall

One factor that could exacerbate matters is the number of maturities in the next few years for lower-rated borrowers. More than 20% of sub-BB borrowers are facing a maturity in the next three years, according to the research. 

To be sure, defaults haven’t yet risen to the heights many expected. In last year’s version of the Deutsche Bank report, the analysts forecast a surge in failure-to-pay events fueled by a US recession. 

In 2023 “we thought we would see an elevated default cycle in 2024 due to a US recession,” the analysts wrote in this year’s version of the report. 

“While we changed our view on the latter at the start of 2024 due to a more optimistic US growth outlook, does the argument of a structurally higher level for defaults still hold over the next few years, after 20 years of it being exceptionally low? We think it does.”

©2024 Bloomberg L.P.