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Oil Price Rise A Factor in Global Default Rate Decline, Moody’s Says

The trailing 12-month global speculative-grade default rate declined slightly to end the third quarter at 4.5%, with the stabilization of oil prices helping to stop the bleeding, according to a report issued Tuesday by Moody’s Investors Service.

Moody’s said it expects the global speculative-grade default rate to end the year at 4.4%, compared to 4.6% at the end of 2Q2016. Further declines in the default rate are anticipated in 2017, with a projected rate of 3.3% by the end of 3Q2017, the ratings agency said.

"Our default outlook for speculative-grade firms is consistent with narrowing high-yield spreads," said Moody's Senior Credit Officer Sharon Ou. "Furthermore, the rise in oil prices since early 2016 has facilitated asset sales and better capital market access for the energy sector, which has been the main driver of defaults over the past two years."

Moody’s saw its Liquidity Stress Index reach record highs in the oil and gas sector earlier this year (see Shale Daily, April 5).

In the United States, Moody’s said it expects the speculative-grade default rate to climb from 5.4% currently to end the year at 5.9% before declining to 4.1% by 3Q2017.

The agency said that commodity sectors will continue to see higher default risk over the next 12 months, including the oil and gas sector, with a projected 5.2% default rate over that period.

The total number of defaults among Moody’s-rated corporate issuers declined to 25 in the third quarter, compared to 50 in 2Q2016. Fifteen of the 25 defaults came from the commodity sectors, similar to shares from previous quarters.

“Not surprisingly, defaults remained concentrated in the U.S. -- as it has the largest number of speculative grade issuers -- which saw 20 defaults in the third quarter,” Moody’s said. Included in the agency’s list of defaulters were Comstock Resources Inc., W&T Offshore Inc. and PetroQuest Energy Inc., “all of which completed distressed exchanges in September, an event considered as a type of default by Moody’s.”

Last month, Moody’s said the oil and natural gas bust beginning in 2015 fueled a spike in the U.S. default rate that rivaled the telecom industry collapse in the early 2000s, both in recorded bankruptcies and low creditor recoveries (see Shale Daily, Sept. 14).

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