Commodity sectors led to a rise in US non-financial corporate defaults to the most since the third quarter of 2009, Moody's Investors Service says in its latest quarterly default monitor. Cash flow pressures saw 11 oil and gas and five metals and mining companies default in the first quarter of 2016, contributing 16 of the quarter's 23 defaults. In the final quarter of 2015, there were 16 defaults including nine energy companies.
“Weakness in the commodities sector continued to push the US speculative-grade default rate higher in the first three months of this year, with oil and gas, and metals and mining companies accounting for the bulk of defaults,” said Moody's Senior Vice President, John Puchalla. “Our default risk indicators continue to weaken, warning that the current upward default rate pressure would increase if the US economy falters.”
The US speculative-grade default rate rose to 4.1% in the first quarter of 2016 from 3.2% the prior quarter, and is projected to climb to 6.0% by the end of this year as oil and gas companies come under continued pressure from the rout in energy prices, according to Moody's new report “US Corporate Default Monitor – First Quarter 2016: Defaults and Restructuring Risk Indicators Jump in First Quarter.” This would bring the default rate to its highest level since July 2010. The 18.5% one-year US speculative-grade default rate for oil & gas and metals & mining companies in March was significantly higher than the 1.9% rate for all other sectors.
Outside the commodities sector, seven companies defaulted in the first quarter of 2016, in line with the fourth quarter and the non-commodity quarterly average over the past two years. “Liquidity and default pressures are much less pronounced outside of energy,” Puchalla said. “Slow economic growth, modest maturities over the next year and a lack of widespread covenant issues have helped limit the spread of default risk to other sectors.”
Moody's Liquidity Stress Index (LSI) jumped to 10.2% in April from 6.8% at the end of 2015, but excluding commodities companies it remained below average, at 5.3%. Speculative-grade debt spreads have also narrowed and new debt issuance is increasing. But with spec-grade yields and investor risk aversion higher than they were a year ago, borrowing to fund investment and resolve liquidity issues is more difficult, with the resulting drag on economic activity heightening default risk.
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