Junk-Rated Defaults Seen Continuing at Low Rate

Still, given the fall in energy prices, Moody's expects the speculative-grade default rate to rise to 3.1% in 2016.
Matthew HellerMay 4, 2015

Risky corporate borrowers continue to default at a low rate with only a slight increase expected over the next year, according to Moody’s Investors Service.

The speculative-grade default rate, which tracks so-called junk-rated issuers, remained unchanged at 1.9% in the first quarter of 2015, Moody’s said in its latest monthly default report. The historical average default rate among junk-rated companies is 4.5%.

Moody’s sees the rate rising to 3.1% in 2016, reflecting in part the sharp drop in energy prices, which has increased operating and liquidity pressures in the oil & gas sector. But it said default risk remains benign in other sectors, taken as a whole, and the default rate “will remain well below its 4.4% long-term average since 1993.”

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“The stress in the energy sector has been reflected in a number of Moody’s metrics such as the liquidity stress index, the B3 negative and lower corporates rating list, and the distressed index, but other sectors remain calm and the pace of corporate defaults remains low and steady,” Albert Metz, managing director of Moody’s Credit Policy Research, said.

“Ample liquidity, together with a recovering U.S. economy, will likely contribute to a low default rate in the near future,” he added.

According to Moody’s, there were eight corporate non-financial defaults on junk-rated debt in the first quarter, including the bankruptcy filing by Caesars Entertainment Operating Co. Defaulted debt totaled $27.1 billion, the second largest quarterly tally since defaults peaked in the second quarter of 2009.

On the oil and gas side, the sector’s liquidity-stress index (LSI) more than doubled to 9.8% in March from 4.4% in December as negative cash flow, borrowing-base redeterminations, and increased potential for covenant breaches pressured liquidity.

But the index is still well below its 26% peak in March 2009 during the last oil price slump and Moody’s said the energy sector’s liquidity pressures are not spreading to other sectors. The composite LSI excluding oil and gas hit a record low 2.6% in February before finishing the quarter slightly higher at 2.7%.