Size of Company Now Matters Less in Commodities Sector Defaults

Defaults in the commodities sector, particularly involving oil/gas companies and the metals and mining sectors, have been on the rise in the second quarter and could reach a level not seen in the U.S. since last decade’s recession. And the tally has not been limited to small players with feeble capitalization.

"Notably, even company scale proved to be insufficient to immunize many commodity companies against the lingering effects of the price rout, as the number of defaults affecting at least $1 billion of debt more than tripled to 11 in the second quarter from three in the first quarter," said Moody's Investors Service Senior Vice President John Puchalla. "As a result, we saw the amount of defaulted debt jump 123% to $45 billion, which matched the highest quarterly dollar amount since the recession."

Sixteen oil and gas companies defaulted in the second quarter, leading to 30 defaults so far this year—compare that to the 26 defaults in the sector for all of 2015, Moody’s Investors Service said.
Bankruptcies in the oil and gas sector, in particular, are very different today in that they’re affecting firms of drastically varying sizes and stem from highly leveraged long-term debt in a market where a barrel of oil is close to $40, whereas unsecured trade debt has not been as much of an issue, said past NACM-National Chairman Toni Drake, CCE, president of TRM Financial Services, Inc., of Midland, TX.

Credit professionals need to scan the financials of publicly-traded firms and look out for changes in lending covenants or rules that indicate their lenders are scaling back, she said. From a collections standpoint, they should be securing debt and making sure their relationship with the client is as open as possible to get as much payment as possible. “It’s time to take a whole new look at that larger customer,” she said.

Defaults in the commodities sector have driven the overall U.S. speculative-grade default rate to 5.1% in the second quarter from 4.4%, while Moody’s anticipates the rate to climb to 6.4%, the highest rate since June 2010. Now take a look at the speculative-grade default rate for the commodity sector: 23.9% in the second quarter, up from 19.9% the prior quarter.

- Nicholas Stern, editorial associate

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