Moody's: Global spec-grade default rate forecast to decline to 1.7% as default tally recedes below 100 for first time since 2014

The global default rate for speculative-grade companies rated by Moody's Investors Service is expected to decline to 1.7% by the end of 2018 from 2.9% in 2017, the rating agency says in its just-published annual default study. The overall default rate for speculative-grade and investment-grade issuers combined is expected to retreat even lower, to 0.8% from 1.4% during the same period.

"Our 2018 forecast is below the 1.9% rate at the end of 2014, reflecting our view that the default cycle driven by low commodity prices has ended," said Sharon Ou, a Moody's Vice President -- Senior Credit Officer. "Supportive credit conditions as evidenced by faster GDP growth in the G-20 countries, a sustained recovery in commodity prices, generally healthy corporate earnings and relatively low refunding risk will help keep defaults low."

Despite the commodity sectors having been the major driving force of defaults in the past three years, Moody's expects the overall default rate for the combined Oil & Gas and Metals & Mining portfolios to fall sharply this year as compared to 2017, to 1.8% from 4.9%. The declining forecast reflects the sectors' stabilizing fundamentals following the rise in commodity prices, alongside the weakest companies having already restructured or defaulted.

Of the 91 rated corporate issuer defaults in 2017, Oil & Gas recorded 25 defaults, the highest among tracked sectors. Retail had the second most defaults, at 13, as it suffered from structural shifts in consumer buying behavior and rising e-commerce penetration. And although the Oil & Gas sector accounted for the most defaults last year, its contribution to the total issuer count fell significantly to 27% in 2017, down from 46% in 2016. This stands in stark contrast to Retail, which saw its footprint increase appreciably to 14% from 6%.

Corporate defaults overall declined in 2017 after rising significantly during the prior two years as a result of stress in the commodity sector. The tally of total defaults fell more than one-third, to 91 rated corporate issuers, from 2016's total of 143 -- the first year since 2014 that global defaults numbered fewer than 100, Ou says. Last year's largest defaulter was Venezuelan energy giant Petroleos de Venezuela, S.A., which missed payments on more than $20 billion in debt.

"Credit quality among our rated issuers improved in 2017, with rating upgrades catching up and breaking even with downgrades," Ou added. "Across sectors, the most notable credit improvement in rating drift was found in Metals & Mining, even as Media: Diversified & Production weakened the most."

Rating drift is calculated as the average upgraded notches per issuer minus the average downgraded notches per issuer. Of 35 industry groups tracked by Moody's analysts, 24 had better rating drift in 2017 than in 2016, while 31 recorded higher drift relative to their historical averages.

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