Junk-Bond Default Rate May Nearly Double in a Year, UBS Says

U.S. junk-bond defaults could nearly double by the third quarter of next year, led by energy, metal and mining companies under pressure from depressed commodities prices, according to UBS Group AG.

The high-yield default rate may climb as high as 4.8 percent, UBS analysts wrote in a note to clients Thursday. The default rate for speculative-grade debt in the U.S. was at 2.5 percent at the end of September, according to Moody’s Investors Service, up from 2.1 percent in the second quarter and 1.6 percent a year earlier.

The default rate for junk-rated energy and natural-resources companies -- which make up the bulk of speculative-grade debt -- may increase to 15 percent over the next year, Zurich-based UBS said, up from the current 10 percent rate reported by Moody’s.

"The sector is out of whack," UBS strategist Matthew Mish said. "Capital markets are showing much greater tiering of credit quality. It’s not just energy issuers that can’t tap the market right now."

The default rate increased as the price of oil plunged by about 60 percent from last year’s June high amid slowing growth in China, the world’s biggest commodity importer.

The lowest-rated debt is poised for more pain, said Mish, even as what investors demand to hold debt rated CCC and below versus the broader high-yield market has risen to the highest level since the financial crisis, according to Bank of America Merrill Lynch Indexes.

"Valuations there are still too tight for the underlying risk," Mish said.

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