With oil prices tanking and few signs of a rebound, the pool of companies with significant debt problems is growing increasingly crowded.
Standard & Poor’s and Moody’s Investors Service released reports Thursday showing that the number of companies in the low end of junk territory and a negative outlook rose to the highest level in five years. Indeed, Moody’s said the list is approaching a high previously reached during the financial crisis.
Both ratings firms said companies in the energy industry and with exposure to it are most at risk of falling into distress. The sector has already accounted for a quarter of 102 global defaults recorded by S&P in 2015, the worst year since 2009. The gloomy mood is forcing many investors to all but give up on their oil and natural gas positions in the short term and hope for a rebound in 2016.
“People are not trying to salvage their energy holdings this year,” said Anders Maxwell, a restructuring adviser who focuses on commodities companies at Peter J. Solomon Co. “Managers are just keeping their fingers crossed, hoping there isn’t another big correction coming.”
S&P said that the so-called “weakest links” climbed to 187 as of Nov. 19, up from 178 on Oct. 26 and the highest since 2010. Of those companies, 33 were in oil and gas. The figure was calculated based on the number of borrowers rated B- or lower with either negative outlooks or negative implications on Credit Watch that indicates strong possibility of further downgrades.
Meanwhile, Moody’s pointed to 239 borrowers rated B3 and below with negative outlooks as of Dec. 1, a 37 percent jump from a year ago and the highest since the first quarter of 2010. Moody’s B3 score is equivalent to S&P’s B- rating, which is six levels below investment grade. The energy industry contributed a record 26 percent to the count.
The number of distressed bonds -- those yielding 1,000 basis points more than Treasuries -- traded in the U.S. reached almost 700 in November, the most in six years, according to data from Trace. They currently have an outstanding face value of $400 billion.
The ratings firms don’t believe the worst is over and expect to see more companies fall to distressed levels in the beginning of next year.
“Many weakest links have already defaulted, and we expect a large proportion of the defaults in the next few quarters to come from this group,” Diane Vazza, head of S&P’s Global Fixed Income Research Group, said in the report.
Coal miner Arch Coal Inc., Pacific Drilling S.A. and Petroleos de Venezuela S.A. made S&P’s weakest-link list, along with other borrowers that have commodities exposure. The energy and natural resources sector had a default rate of 10.39 percent, the highest among all industries and more than three times higher than the media and entertainment sector, which had the second-worst rate at 3.04 percent, in the 12 months ended Oct. 31.