Driven by weakness in the natural resource sectors, corporate defaults are on track to reach their highest level in seven years, says Moody’s Investors Service in a new report entitled Corporate Default and Recovery Rates, 1920-2015.
The New York-based rating agency forecasts that global speculative-grade corporate defaults will increase by more than 30% in 2016, hitting their highest level since 2009. On a global basis, the speculative-grade default rate will hit 4% in 2016, states the report released on Tuesday.
Moody’s notes that defaults almost doubled in 2015 and that credit conditions are expected to worsen this year, reflecting the effects of a prolonged downturn in the commodities sector.
“Although credit quality declined throughout 2015, the magnitude of ratings downgrades widened significantly in the fourth quarter,” says Sharon Ou, vice president and senior credit officer at Moody’s, in the report. “These factors, combined with the sharp increase in defaults and rising investor caution, indicate that the credit cycle is turning.”
Moody’s also notes that the defaults in this credit cycle are unique in that they are sector-specific. In 2015, the mining sector had the highest default rate among all sectors, at 6.5%, followed by the energy sector at 6.3%.
“Persistently low commodity prices, slowing economic expansion and widening high-yield spreads will send default rates higher in 2016,” says Ou. “The prospect of further interest rate hikes by the Federal Reserve could also lead investors to become even more risk-averse.”