Energy Failures Push U.S. High-Yield Default Rate to 6-Year High

  • Overdue speculative bonds reach 5.1 percent in second quarter
  • Fitch expects skipped payments to hit $90 billion by year-end

U.S. high-yield bonds in default reached the highest levels in at least six years as more energy companies buckled under pressure from stagnant oil prices.

Speculative-grade U.S. defaults spiked to 5.1 percent of the total outstanding in the second quarter from 4.4 percent in the first, according to a July 12 report from Moody’s Investors Service. The global high-yield default rate could finish the year at 4.9 percent, with the U.S. as much as 6.4 percent, Moody’s said.

Missed payments on high-yield or speculative bonds are already near levels that prevailed in 2009 and 2010, according to analysts at Moody’s and Fitch Ratings, who are forecasting defaults will get worse before they get better next year. At $50.2 billion, U.S. high-yield defaults have already surpassed the $48.3 billion total for all of 2015, and they’re on course to reach as much as $90 billion by year-end, according to a separate July 12 report from Fitch.

“Defaults are still on the rise,” Sharon Ou, senior credit officer at Moody’s, said in a phone interview. “The commodity-related sectors are still under distress.”

Transitory Effects

Moody’s forecasts the default rate for metals and mining at 10.2 percent and oil and gas at 8.6 percent over the next 12 months. Commodity prices have been low for a long time, Ou said, and despite the moderate rebound in oil prices, the sector still hasn’t seen any fundamental improvement.

The U.K.’s vote to leave the European Union probably won’t create a spike in corporate defaults because central banks will continue funneling liquidity to capital markets, Moody’s wrote. European speculative-grade defaults will fall to just 1.9 percent by year-end, the report said.

Big Names

“We’ve seen energy and metals and mining pretty much driving everything in terms of defaults,” said Eric Rosenthal, Fitch’s senior director of leveraged finance. Fitch expects the energy default rate to end the year between 16 and 18 percent.

Exploration and production company defaults will range between 30 and 35 percent, and since the sector is already near those highs, the worst may be behind them, assuming oil prices stay between $45 to $55 a barrel, Rosenthal said. Energy defaults at midyear stood at $28.8 billion, versus $17.5 billion for all of 2015.

“Most of the big names have already filed,” he said. “I would expect most of the energy names to essentially clear out by this year.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE