The global speculative-grade default rate continues to climb, driven by the stress that low commodity prices are putting on issuers in the sector, says Moody’s Investors Service in a report released on Tuesday.
The trailing 12-month speculative default rate finished the second quarter at 4.5%, up from 4.0% in the prior quarter, and up from 2.5% a year ago, the Moody’s report says.
The firm forecasts that the rate will rise to 4.9% by the end of the year, before declining to 4.2% in a year from now. The rising default rate is being driven by “the stress that low commodity prices are putting on issuers in the sector”, according to Moody’s.
However, the United Kingdom’s decision to leave the European Union is unlikely to have a significant impact on corporate defaults, at least in the near future, the report says. Despite heightened volatility in the global equity markets in response to the U.K. vote, central banks are “keeping accommodative monetary policies post-Brexit to ensure capital markets have sufficient liquidity,” the Moody’s report says.
“Even so, we have less reason for optimism within the commodity and related sectors,” says Sharon Ou, vice president and senior credit officer at Moody’s, in a statement. “These are expected to remain under stress.”
There have been 88 global corporate defaults so far this year, with 48 Moody’s-rated issuers defaulting in the second quarter. Most of the second quarter’s defaults were in commodity sectors, the Moody’s report notes, including 23 in the energy sector and six in metals & mining. By comparison, there were only 49 defaults in the first half of 2015, the report says.
The United States is driving the increase in speculative-grade defaults. The U.S. rate rose to 5.1% in the second quarter, up from 4.4% in the first, Moody’s says; adding that it expects the rate to reach 6.4% by the end of the year. “Low prices of oil and gas, as well as other commodities, will help push the default rate for U.S. oil and gas companies to 8.6%, and 10.2% for metals & mining issuers over the coming year,” the Moody’s report says.
By contrast, the default rate edged down in Europe to 2.4% from 2.5%, with just six defaults in the second quarter. Moody’s predicts that the default rate in Europe will continue to fall, dropping to 1.9% by the end of the year.