Default risk to continue climbing in 2016: Moody's

MOODY'S on Thursday said it expects default risk to climb in 2016 as a result of widening spreads, sustained stress in commodity sectors, and the economic slowdown in China, among other factors.

Its Credit Transition Model predicts that the global speculative-grade default rate will rise to 3.9 per cent at end-2016, which if realised, will still remain below the historical yearly average of 4.2 per cent since 1983.

By region, it forecasts that the speculative-grade default rate will gradually rise to 4.4 per cent by end-2016 in the United States and stay near 3 per cent in Europe.

Among US issuers, defaults in 2016 will likely be concentrated in a handful of industries, led by metals and mining and oil and gas.

In Europe, the oil and gas industry is expected to have the highest default rate over the next 12 months, followed by the hotel, gaming, and leisure industry.

This comes after Moody's said 35 of its rated corporate issuers defaulted in the fourth quarter of 2015, up from 24 in the third.

In 2015, oil and gas was the most troubled sector, contributing more than 30 per cent of defaults in the fourth quarter.

Several sizable oil and gas companies such as Chesapeake Energy Corporation, California Resources Corp and Offshore Group Investment Ltd defaulted on their debt obligations.

The banking sector followed behind and accounted for 17 per cent of defaults.

For 2015, the default tally was 108, almost double the previous year's 55.

Of the 35 defaults in the fourth quarter, more than half were distressed exchanges; the rest were bankruptcies (26 per cent) and payment defaults (20 per cent), it said.

Region wide, nearly half of the defaults were in North America while 26 per cent of defaults were in Europe.

With the number of defaults rising in the fourth quarter, the issuer-weighted trailing 12-month global speculative grade default rate finished at 3.4 per cent in the fourth quarter, up from 2.6 per cent in the prior quarter.

For the US, the comparable rate rose to 3.2 per cent from 2.7 per cent and to 3.4 per cent from 2.2 per cent for Europe.

Measured by dollar volume, the global speculative-grade bond default rate ended the fourth quarter at 3.4 per cent, up from 2.3 per cent in the prior quarter.

For the US, the dollar-weighted bond default rate rose to 3.4 per cent from 2.5 per cent during the same period while for Europe, the rate more than doubled to 3.2 per cent from 1.5 per cent.

In the leveraged loan market, six loan defaults were recorded in the fourth quarter, with all but one being from the US.

The US leveraged loan default rate ended at 2 per cent in the final quarter of 2015, up from 1.6 per cent in the previous quarter. A year ago, the rate was lower at 0.9 per cent.