Credit risk for speculative grade companies is rising more quickly in Canada than in other developed economies, due to a combination of both macroeconomic headwinds, and the high level of private equity ownership for these companies, which often translates into higher leverage, says Moody’s Ratings.
According to a new report from the rating agency, default risk is rising for speculative-grade issuers in Canada — with the share of rated issuers carrying low credit ratings (B3 negative or lower) more than doubling over the past year, reaching a three-year high.
“The increase highlights Canada’s growing divergence from other large developed markets, many of which experienced relative stability or modest improvement in credit quality last year,” the report said.
“The weakening in Canada reflects a confluence of macroeconomic hurdles, including inflationary pressures, elevated interest rates and trade-related disruptions, increasing issuers’ vulnerability to defaults,” it added.
That vulnerability is also heightened by the growth of private equity ownership in Canada, it noted, with nearly half of speculative issuers now owned by private equity firms, up from almost none in the early 2010s.
That growth reflects a collection of factors, including a prolonged period of low interest rates, abundant global liquidity, and increased allocations to private equity by pension funds, Moody’s said.
And, as private equity ownership has grown, “sponsors have increasingly pursued aggressive financial strategies, including debt-funded dividends and restructurings,” the report said. It added that this has “boosted leverage and increased the speculative-grade segment’s exposure to even modest macroeconomic stress…”
Against this backdrop, speculative-grade default rates have risen more quickly in Canada, with the 12-month trailing default rate reaching about 8% in late 2025, up from around 2.5% in mid-2022, and well ahead of the global default rate of approximately 3%-4%.
Moody’s is forecasting that Canada’s speculative-grade default rate will hover around the range of 5% to 7% this year, “with downside scenarios, including a recession, pushing it toward the upper end of that range.”
At the same time, the report also said that it expects the risk stemming from private equity to ease, “as Canadian public pension funds increasingly recalibrate their [private equity] strategies away from pure profit maximization amid heightened scrutiny and disappointment with recent performance.”
In this climate, “pension plans are tightening underwriting standards, prioritizing downside protection and cash realization, and shifting away from direct, high-risk ownership and toward investments and partnerships that reflect more selective capital deployment,” it said.