Olatunde Gaffar on How Global Banks Tighten Credit Standards Amid Rising Corporate Debt Defaults

By Korede Omololu-David

Corporate debt defaults are climbing to their highest levels in a decade, prompting global banks to tighten credit standards and reassess their exposure to leveraged firms. Global corporate default rates reached 4.2% by mid-2020, up from 1.5% in 2018, with distressed debt volumes exceeding $600 billion across developed and emerging markets. The shift marks a cautious turn in institutional risk appetite, with ripple effects across capital markets and corporate refinancing strategies.

Olatunde Gaffar, a financial risk strategist, sees the trend as both necessary and overdue. “We’re witnessing a recalibration of credit risk in real time,” he said. “Banks are no longer willing to extend cheap credit to firms that lack resilience in a high-interest environment. This is a defensive move to protect balance sheets.”

The sectors most vulnerable include real estate, retail, and energy, where debt-fueled expansion has collided with slowing demand and rising borrowing costs. “Defaults are not evenly distributed,” Gaffar noted. “They cluster in industries where leverage was used as a growth strategy rather than a sustainability tool.”

However, the tightening is creating a bifurcated market. Investment-grade companies continue accessing capital at relatively favorable terms, while firms rated BB+ and below face dramatically higher spreads—often 500-700 basis points above benchmarks—or outright credit rationing. “You’re seeing a flight to quality,” Gaffar observed. “The middle tier is getting hollowed out. Either you have fortress balance sheets, or you’re fighting for survival.”

Private equity firms, once buoyed by abundant credit, are also feeling the squeeze. Refinancing highly leveraged buyouts has become increasingly difficult, forcing portfolio companies to restructure or divest. The “refi wall”—an estimated $1.2 trillion in leveraged loans maturing between 2020 and 2022—looms particularly large for deals executed during the 2016-2018 low-rate window. “The tightening of credit standards is a signal to private equity: the era of easy leverage is over,” Gaffar emphasized. “Future deals will require stronger fundamentals and clearer paths to profitability.”

Looking forward, Gaffar believes the recalibration could strengthen the financial system if managed carefully. “This isn’t just about limiting risk — it’s about restoring discipline to lending practices,” he said. “When banks properly price risk, capital flows to viable businesses instead of propping up zombie companies. That means fewer misallocated resources, more realistic asset valuations, and ultimately a more resilient financial system. The creative destruction may be painful, but it’s necessary for healthier capital markets.” “For corporate treasurers, the message is clear: refinance now if you can, and build liquidity buffers. For investors, the distressed debt cycle is creating selective opportunities—but only for those who can distinguish real turnarounds from value traps.”