The default rate for global speculative-grade securities continued to rise in July and remains above the long-term average, according to a new report from New York-based Moody’s Investors Service Inc.
The credit-rating agency reports that the trailing 12-month global speculative-grade default rate came in at 4.7% in July, up from 4.6% in June and remains above the long-term average of 4.2%. Moody’s expects the default rate to continue rising in the months ahead, peaking at 5.1% in November.
Moody’s reports that 11 rated companies defaulted in July, pushing the year-to-date total to 102 defaults. The commodities sector remains the centre of default activity, it notes, as issuers face continued cash flow pressures as a result of low oil prices.
Of the 62 commodities companies that have defaulted so far this year, 49 are in the oil and gas sector and 13 are in metals and mining. In July, seven oil and gas companies defaulted.
By region, the defaults this year have been concentrated in North America, the Moody’s report says. So far, 80 North American issuers have defaulted, compared with 10 from Europe; the remaining 12 are from Asia, Latin America and Africa.
Looking ahead, Moody’s expects the default rate to start declining in 2017.
“In the month since U.K. voters opted to leave the European Union, high-yield spreads have returned to their pre-Brexit levels in both Europe and the U.S.,” says Sharon Ou, vice president and senior credit officer at Moody’s, in a statement. “This helps relieve the pressure on future default rates.”
The Moody’s report also notes that there have been moderate improvements in the firm’s liquidity stress index, which also eases the default pressure.
That said, “these measures currently stand at levels that suggest high-yield issuers remain vulnerable to any economic weakening,” Moody’s says.