Outlook 2017: S&P says higher speculative-grade defaults; Fitch, Moody’s view lower

By Colin Hanner

Chicago, Dec. 30 – Default rate predictions from the three major rating agencies are mixed heading into 2017, with the bulk of defaults stemming from the fluctuating energy sector.

Standing against the shifting sentiment is S&P Global Ratings, which expects the U.S. corporate trailing 12-month speculative-grade default rate to increase to 5.1% by September 2017, from 5% in September 2016.

On the flip side, Fitch Ratings forecasts a lower high-yield default rate at approximately 3%, with the expectation that 2016 high-yield default rate will be approximately 5%.

Moody’s Investors Service expects the global speculative-grade default rate to ease to 3.2% in November 2017 from its projected 4.3% rate in 2016.

S&P: default rate to increase

Expect the corporate trailing 12-month speculative-grade default rate to increase to 5.1% by September 2017 from 5% in September 2016, forecasts S&P in a global credit market outlook for the upcoming year.

“We expect the speculative-grade default rate to continue rising – with temporary fluctuations – through early 2017 and then to level off toward the end of the first half of the year, with declines afterward,” the report said.

Much of the uncertainty from 2016 – from the United Kingdom’s decision to leave the European Union to Donald Trump’s unexpected victory over Hillary Clinton for the White House and the Federal Reserve’s hesitancy to raise interest rates – will carry into 2017 in the form of increased volatility, the rating agency predicts, but will not have any “major negative impact on ... default rates.”

The heightened volatility around energy and natural resources will subside after the second quarter of 2017, the rating agency predicts, and with it will decline the speculative-grade corporate default rate in these sectors.

The amount of issuers in the energy and natural gas sector has decreased to approximately 10%, a nearly 3% drop from last October, and, paired with the decreased costs of exploration and production year over year in these sectors, as well as a lack of apparent contagion to other sectors, S&P expects energy and natural resources defaults to slow in the next year.

Yet, oil prices won’t see substantial increases in the coming year, and, therefore, energy and natural resources will remain the bulk of global corporate defaults and downgrades.

Fitch: 3% default rate

The 2017 U.S. high-yield default rate will be approximately 3%, which amounts to $45 billion of default volume, Fitch forecasts. This forecast is similar to the default volume reached in 2015, the ratings agency said.

The expected 2017 default rate would decrease the default volume by $30 billion compared to 2016, which Fitch predicts will end with a 5% high-yield bond default rate. The 2016 high-yield default rate figures were revised to 5% from 6% following improved market conditions for lower-quality issuers.

“We worked through a lot of those defaults in the commodity-related sectors, and that’s really the primary reason for the decline for the default rate,” said Michael Paladino, head of leveraged finance at Fitch, in an interview with Prospect News.

Through September, the default rate for the energy sector was 15.5% and the metals/mining sector was 13.9%, Fitch reported, and notwithstanding those sectors, the ratings agency expects the 2016 default rate to finish at approximately 1.5%.

In energy, Fitch expects the sector to be stable, upgraded from its 2016 outlook of negative. The ratings outlook of the sector was downgraded to negative for the coming year, following a stable outlook from the year prior.

Moody’s: defaults to decline

A benign default rate will characterize 2017, Moody’s predicts, specifically that the global speculative-grade default rate will ease to 3.2% in November 2017 from its projected 4.3% rate in 2016.

The agency forecasts that if this default rate is realized, the default rate will fall below a historical average of 4.2%, with both the United States and Europe factoring into the rate.

Year to date from time of publication, 129 Moody’s-rated corporate issuers defaulted, the highest post-crisis levels since 2009, though the picture was very different from the front half of the calendar year to the last half of the year.

The number of defaults tallied in the double-digits from February-July but began to dwindle in August, culminating in four defaults for the entire month of November, the lowest monthly total in the past two years.

The slowdown in defaults can be attributed to two factors, Moody’s said. Since most defaults have arisen from the oil and gas sectors, many of those weaker issues have already defaulted.

Commodity prices have also recovered, particularly oil, which fell as low as $30 per barrel in February and reached as high as $50 in recent weeks.

For the coming year, don’t expect commodities to be at the helm of the default-sphere, Moody’s estimates.

In the United States, the default rate will be the highest in the metals and mining sector at 6.3%, followed by electricity at 6.1%, finance at 4.8% and oil and gas at 4.8%.

Yet, in the most recent wave of defaults, oil and gas accounted for the most defaults in the United States.

Oil and gas developer and producers Enquest plc and Ascent Resources accounted for two of the four defaults in November.

Fitch: loan defaults lower

Fitch also expects the institutional leveraged loan default rate to be roughly 2% for 2017 with a total volume of $19 billion. The 2016 forecast was 2.5%.

“Leveraged U.S. corporates have pushed back high-yield bond and leveraged loan maturities predominantly to 2020 and beyond,” the rating agency wrote in a year-ahead outlook report.

Fitch reports that 8% of high-yield bond and leveraged loan debt will mature over the next two years, led by the energy sector, which comprises about 21% of maturities.

The policies and agendas that could be enacted by a Donald Trump administration are uncertain, the ratings agency notes, though it highlights tax cuts – and therefore, potentially corporate investment. Meanwhile, trade protectionism could have an adverse effect on the U.S. economy.

That being said, Fitch does not believe refinancing risk for leveraged companies is worth the uncertainty.

“Fitch does not believe the refinancing risk is material for leveraged U.S. corporates in spite of growing uncertainties surrounding new presidential policies and agendas,” the agency said.

© 2015 Prospect News.
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