Investment Banking

Junk Defaults to Rise to 4.6% in Next Year

Moody's cites "deteriorating credit conditions especially in commodity sectors such as oil & gas and metals & mining."
Katie Kuehner-HebertApril 11, 2016

Corporate defaults are set to rise due to deteriorating credit conditions across the globe, both Moody’s Investors Service and Deutsche Bank warned.

Moody’s said in its March Default Report that the global default rate on junk bonds should rise to 4.6% in one year, from the current level of 3.8%, and reach 4.3% in the second quarter, surpassing the long-term average of 4.2% for the first time since August 2010.

“Although high yield spreads tightened over the past few weeks, the global default rate is anticipated to keep rising due to deteriorating credit conditions especially in commodity sectors such as oil & gas and metals & mining,” analysts at the ratings agency wrote.

A Better Way to Do Ecommerce

A Better Way to Do Ecommerce

Learn how Precision Medical leveraged OneWorld to cut the cost of billing in half and added $2.5M in annual revenue.

For all Moody’s-rated oil and gas issuers in the U.S., default rates are very likely to remain at 10% over the next 12 months, Moody’s said, while rates should remain at 12.6% for metals and mining. In Europe, default rates are expected to be highest for oil and gas and media issuers.

Thirty-three Moody’s-rated issuers defaulted in the first quarter, 13 of which were from oil and gas and eight of which are metals and mining. In comparison, there were only 22 defaults in the same period of last year and 27% were contributed by commodity sectors.

The most recent defaults in these sectors include Foresight Energy, Venoco, Rex Energy, Southcross Holdings, and Cliffs Natural Resources, with each defaulting on more than $500 million in debt.

Globally, the trailing 12-month global speculative-grade default rate rose to 3.8% in the first quarter from 3.5% in the previous quarter. A year ago, the global rate was noticeably lower at 2.2%.

Deutsche Bank analysts also said in a report they expect the number of companies unable to pay their debts will tick up over the next few years, according to City A.M.

“In spite of all the challenges we face, this era has been characterized by astonishingly low default rates,” the analysts wrote. “There are clear signs the cycle is turning though, especially in the U.S.”

The analysts pointed to higher debt levels, tightening monetary policy combined with flatter yield curves, and the possibility of an external shock, as three key predictors of defaults that are “all flashing red.”