According to the report, the total value of North American oil patch bankruptcies since the beginning of 2015 now stands at $66.5 billion and the number of companies filing for bankruptcy protection has only accelerated in recent months.
However, it’s not just the energy patch that is feeling the heat. According to credit rating agency S&P, the total number of global corporate bond defaults hit 100 at the beginning of July, up 50% year-on-year, bringing the total notional value of defaulted debt to $154 billion for the year.
Corporate defaults accelerating
In a world where more than $13 trillion of sovereign debt trades at negative yields, and two of the world’s four most important central banks have introduced negative interest rate policies, it seems absurd to claim that corporate defaults have hit a high not seen since the financial crisis. But this is exactly what could happen if the number of corporate defaults continue to grow at the current rate.
Between mid-July and mid-August, 13 more companies file for bankruptcy protection bringing the total of corporate defaults this year to 113. Only 113 companies defaulted in the whole of 2015, and the current default tally is 57% higher than the count at this point last year. If this trend continues by the end of the year, the number of global corporate defaults will either be higher than, or match the total number of defaults for 2009.
Analysts at S&P don’t believe that the increase in defaults is just a fad. In fact, the rating agency’s analysts are predicting that the US corporate default rate will jump 30% to 5.6% by June 2017.
For some context, according to S&P’s figures the US default rate for the 12 months ended June 2016 was around 4.3%. 79 US companies defaulted in the 12 months ending June 2016, and a default rate of 5.6% implies that 99 US corporates will default over the next 12-month period to June 2017.
Low rates = rising defaults?
It’s hard to explain this trend. The number of corporates defaulting on obligations to creditors is on track to hit a level not seen since the financial crisis this year but yet high-yield spreads continue to contract.
Since the beginning of the year, US high-yield spreads have only declined, a trend which stands in stark contrast to rising number of defaults. At the start of this month, the yield on the lowest rated high yield debt fell to 5.6%. That’s down from 8.15% in mid-February.
Still, it’s not all bad news. Much of the default pain is in the energy and resource sector. According to S&P, stocks in the energy and natural resources industries have accounted for 57% of the defaults of the past 12 months.