Speculative-Grade Default Rate Jumps In November Amid Ongoing Oil Woes

Throughout 2015 and 2016, despite the accommodative monetary policies from central banks around the world, the global speculative-grade default rate rose to 4.2%–its highest level since 2009 according to rating agency Standard & Poors.

Defaults spiked thanks to the rising level insolvencies in the oil & gas sector, as companies continue to feel the pain from the 2014 oil price downturn.

At 4.2% defaults were running just above the 36-year annual average of 4.1%. However, excluding energy, at the end of 2016, the global speculative-grade default rate excluding energy and natural resources was a much more modest 2.3%. The speculative-grade default rate for the energy and natural resources sector was 21.1% by year-end, up from 9.8% in 2015.

“Despite oil prices rising for most of the year, the energy and natural resources sector had increased default activity over an already elevated 2015, and the sector accounted for over 50% of all defaults in 2016. This helped push the corporate default count up to 162–the second consecutive year since 2009 with over 100 defaults. These 162 defaulted issuers accounted for $239.8 billion in debt, which is more than double the $110.3 billion total for 2015.”

Following two years of elevated default rates, 2017 has turned out to be a calmer year for speculative-grade debt.

Speculative-Grade Default Rate Jumps In November

According to Moody’s ‘November Default Report,’  the global default rate is on track to end this year at just 2.8%. For US issues, the rate is projected to fall to 3.2% from the end of November level of 3.4%. In Europe, the speculative-grade default rate could slide as low as 2.3% for 2017, before falling more than 50% to 1.1% for 2018. For the US the default rate is projected to decline to 2.3% by the end of November 2018.

“Moody’s predicts that the global speculative-grade default rate will finish 2017 at 2.8% and then extend its slide to 1.8% a year from now. This favorable default outlook comes out of the backdrop of a growing economy, the recovery in the energy sector, and a strong credit market, which continues to provide sufficient liquidity for spec-grade companies.”

Interestingly, even though speculative-grade default rates are expected to slide year-on-year, for the month of November Moody’s noticed a slight uptick in default incidents. Moody’s global speculative-grade default rate closed at 3.0% for the trailing 12-month period ending November 2017, up from  2.8% a month prior. A year ago, the rate stood at 4.7%.

Speculative-Grade Default Rate

After a period of calm between July and October, defaults began to rise in November. Once again, the energy sector was leading the way followed closely by retail. Moody’s report notes that Across sectors, “Oil & Gas and Retail have been the two biggest contributors of defaults with 19 and 12 defaults, respectively” this year. The report goes on to say “of the ten defaults in November, three were in the Oil & Gas sector, two in Metals & Mining and another two in Retail.

Speculative-Grade Default Rate