Moody's: Global spec-grade default rate up again on continued stress in commodities sector

Moody's Investors Service forecasts that the global speculative-grade default rate will continue to rise this year, to reach 5.0% in November. Thereafter, it will stabilize in the range of 4.5%-5.0% through April 2017.

"We expect the oil price slump to continue to place upward pressure on corporate defaults," said Sharon Ou, a Moody's Vice President and Senior Credit Officer. "Nonetheless, high-yield spreads have tightened noticeably in the past two months, signaling that the default rate could taper off next year."

In the US, the default rate is expected to climb to 6.2% by the end of 2016, but a continued slow pace of defaults in Europe will keep the European speculative-grade default rate below 3.0% over the next 12 months, acting as a damper on the overall, global rate.

Continued stress from low oil and gas prices will see high default rates in the commodities sectors in the coming year, however. In the US, the default rate for Moody's-rated metals & mining companies is forecast to climb to 11.5%, and for oil & gas companies to increase to 10.3%. In Europe, defaults are expected to be highest in the metals & mining sector, followed by forest products & paper.

Forty-six defaults were recorded in the first four months of 2016, with 18 of these in the oil & gas sector and nine in metals & mining. In contrast, there were 29 defaults from January through April last year. Among the 10 Moody's-rated issuers that defaulted last month were Peabody Energy Corporation and Energy XXI Gulf Coast Inc., both of which filed for bankruptcy.

"If defaults continue at the current pace for the remainder of the year, the default count for 2016 will come in at 138, which would match our February prediction," Ou added.

The rise in defaults has also led to an increase in the trailing 12-month global speculative-grade default rate, which edged up 4.0% in April from 3.9% the prior month. In the US, the comparable rate rose to 4.4% from 4.3%, and in Europe it retreated to 2.5% from 2.7%. At this time last year, the US rate stood at 1.7% and the European rate was 2.3%.

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