Corporate debt defaults spike in Jan-May this year, exceeding 2019 total: Fitch Ratings

GLOBAL corporate defaults have seen a "dramatic increase" as the economic crisis from the coronavirus pandemic dealt a body blow to companies around the world, Fitch Ratings said.

The number of debt defaults registered in the first five months of 2020 is already higher than the full-year number for 2019, according to the credit ratings agency. 

There were 28 non-financial corporate defaults recorded in the Fitch-rated portfolio from January to May this year, compared with 25 in all of last year.

"At the current rate, the 2020 annual volume of corporate defaults could exceed the record set during the global financial crisis in 2009," Fitch said in a report.

The corporate sector has been under pressure as the Covid-19 outbreak spread and related lockdowns were expanded globally.

Fitch expects more defaults in the South American region, where the centre of the pandemic has shifted to, even though in many other jurisdictions, the most stringent levels of lockdown have been easing.

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The agency's assessment suggests that the pandemic fallout will erase more than US$5 trillion in revenue from its global corporate portfolio this year, or about 20 per cent of the revenue generated by these companies in 2019.

"This puts significant strain on the credit profiles of affected issuers, and the rate of defaults is likely to remain high throughout 2020."

Fitch noted that all the debt defaulters so far had speculative-grade issuer default ratings at the start of this year, with the vast majority concentrated in the CCC to C range.

More than half of the defaults took place in North America, which is reflective of the composition of the global corporate Fitch-rated portfolio by region. 

Latin America had the second-largest number of defaults in the year to date, because of increased refinancing pressures on speculative-grade issuers in the region.

In the transportation sector, defaults were concentrated in the airline industry, which has been one of the worst hit by the coronavirus pandemic. Passenger flight traffic remains well below the pre-crisis levels in most economies.

"Although we expect travel restrictions to gradually relax, we anticipate social-distancing measures to be implemented at airports and in aircraft cabins, which will delay recoveries in customer confidence and in airlines' cost and operational efficiency," Fitch said.

Meanwhile, in the oil and gas as well as metals and mining sectors, companies suffered from the plunge in commodity prices, which led to more defaults.