Credit Managers' Index Could Close 2016 with Cheerful Rebound

Credit managers appear to have rediscovered a spirit of confidence, according to preliminary data in the latest NACM Credit Managers’ Index (CMI), which will be released Friday morning at www.nacm.org. Pre-election jitters and a lack of clarity that inspired some of the previous months’ volatility may be fading.

Expect the December CMI to show an increase over recent months’ performances. Part of this is because of preliminary data that found manufacturing faring better than expected against formidable headwinds (e.g., the strengthening U.S. dollar and rising Federal Reserve rates). In addition, early signs that an improved (but not record-breaking) holiday sales season versus 2015 activity means that retailers that were previously approaching trouble “will be alive to fight another day.” said Chris Kuehl, Ph.D. That should drive overall improvements to filings for bankruptcies category, which was the only unfavorable factors category within expansion territory (above 50) in November’s disappointing CMI results.

Notable improvements to credit applications are expected in December as well, but it is important to juxtapose them with rejections of credit applications. If the two categories are improving simultaneously, that’s a great sign and will help set the table for a strong start to 2017, Kuehl said.

- Brian Shappell, CBF, CICP, managing editor


For a complete breakdown of the manufacturing and service sector data and graphics, view the December 2016 report on Friday morning by clicking here. CMI archives may also be viewed on NACM’s website.

GDP Growth Likely to End Year on Quiet Note

With consumer spending disappointing in November and durable goods orders soft, GDP growth is expected to end on a quiet note for the year, according to Wells Fargo Securities in a recent economic report. Inflation pressures eased somewhat in December. Based on updated third-quarter GDP data and other indicators, Wells Fargo expects real GDP to expand at a 1.3% annualized rate in the fourth quarter of this year.

Activity in manufacturing is poised to improve in coming years. The factory sector is set to start the new year in expansion territory, a contrast from a year ago, when it was contracting. It should be helped by recovery in the energy sector and improvement in global economic growth, though headwinds may remain from the strong U.S. dollar. Nonmanufacturers are on firmer ground after a rocky 2016.

Durable goods orders fell 4.6% in November due to a drop in civilian aircraft orders. Excluding aircraft and other transportation, new orders rose .5%. Equipment investment may increase in the coming months, due to the fourth-quarter rise of .9% for orders of core capital goods. Current quarter data, however, indicates another soft quarter for equipment investment. Core capital goods shipments remain nearly flat.

Nominal personal spending rose slightly, but, after adjusting for inflation, real spending was up only .1% in each of the last two months. A challenge for consumers is that inflation has picked up while income growth remains slow. Higher prices, however, have not dramatically affected consumer sentiment, Wells Fargo said. Consumer confidence enjoyed a postelection bounce and sits at a post-recession high, which bodes well for economic growth prospects in the 2017.

– Adam Fusco, editorial associate

Federal Reserve Study Indicates Strong Trends in Card Use

From 2012 to 2015, use of credit and debit cards for payments increased, accounting for more than two-thirds of all noncash payments in the United States, according to a Federal Reserve study. The data includes prepaid and nonprepaid cards.

The number of domestic core noncash payments totaled an estimated 144 billion, up 5.3% annually from 2012, said the 2016 Federal Reserve Payments Study, which presents 2015 payments data. The total value of the transactions increased 3.4% to nearly $178 trillion over the same period.

Other findings include:
  • Card payments were led by nonprepaid debit card payments, which grew by 12.4 billion, while credit card payments grew by 6.9 billion.
  • Remote card payments, sometimes referred to as card-not-present payments, accounted for 19% of card payments in 2015.
  • General-purpose card payments initiated with a chip-based card increased substantially from 2012, with growth of 230% per year, but this represented only about 2% of total in-person general-purpose card payments in 2015, during the industry effort to introduce chip card technology.
  • General-purpose card fraud attributed to counterfeiting held a greater share of total card fraud in the U.S. in 2015 compared to countries where the chip technology was more completely adopted. 
  • The number of Automated Clearing House payments is estimated to have grown to 23.5 billion in 2015. 
  • Check payments decreased at a rate of 4.4% annually from 2012 to 2015.

Some survey data will be collected on an annual basis rather than every three years, beginning in 2017, to enhance the value of the study, said Mary Kepler, senior vice president of the Federal Reserve Bank of Atlanta, which sponsored the study.

“The data collected for the 2016 study was substantially expanded,” Kepler said. “This reflects an increased desire within the payments industry for additional fraud-related information. Payment industry participation drives the quality of the study’s results. The Federal Reserve appreciates the industry’s response in 2016 and looks forward to working with selected participants for the annual data collection getting underway in the first quarter of 2017.”

– Adam Fusco, editorial associate

Liquidity Stress Index Points to Declining Default Rate, Moody’s Says

The Liquidity Stress Index (LSI) from Moody’s Investors Service will finish the year in a drop, signaling a moderation in defaults among speculative-grade companies for the coming year, the ratings agency said in its recent SGL Monitor.

“The past year has been choppy for speculative-grade liquidity, with weakness in the commodity sector pushing the LSI to a six-year high in the first quarter and contributing to a jump in defaults,” said Moody’s Senior Vice President John Puchalla. “But since then, the index has trended more favorably, falling below its historical average of 6.8% in October, a milestone related to the gradual letup of challenges in the oil and gas sector and continued good market access for most speculative-grade borrowers.”

The LSI falls when corporate liquidity appears to improve and rises when it appears to weaken. It reached 6% in mid-December. Puchalla said that the sharp drop in the oil and gas sector LSI to 17.1% from a high of 31.6% in March indicates the easing of liquidity and default pressures for the sector in 2017. Balance sheets and investment capacity have improved through asset sales and new financing.

Challenges exist, even in light of expected U.S. economic growth in 2017. Vulnerabilities may lie in the dependence on the market for liquidity and the weak rating distribution of speculative-grade borrowers, but such challenges appear manageable, according to the ratings agency, who expects the U.S. speculative-grade default rate, currently at 5.6%, to reach about 4% by the end of 2017.

The agency’s Covenant Stress Index reached 3.9% in November, down from 4.3% in October, an indication that speculative-grade companies remain at low risk of violating their debt covenants, Moody’s said.

– Adam Fusco, editorial associate

Ongoing Economic Problems in South Africa Pose Great Risks for Agrofood, Automotive Sectors

As Coface expressed concerns about South Africa’s economic performance going into 2017, the credit insurer believes the agrofood and automotive sectors pose major risks.

South Africa’s agrofood sector is among the most developed in Sub-Saharan Africa, is one of the country’s largest manufacturing segments and provides jobs for about 30% of the country’s workforce, analysts with Coface noted. Despite relatively stable demand, “…the deteriorating macroeconomic outlook and uncertainties surrounding economic policies, which are increasingly damaging consumer and business confidence,” place agrofood as a “very high risk.” Reduced investments, poor infrastructure and a weakening of local currency against the U.S. dollar present more added risks to the troubled sector.

Meanwhile, South Africa’s automotive sector is facing a poor economic outlook, high inflation and increasing interest rates, Coface said. “These factors are negatively impacting purchasing power and dragging down domestic sales,” analysts wrote. “New vehicle sales could also suffer from fears over the stability of the labor market and the constant threat of strikes.” A falling rand may also affect production costs that producers are likely to add on to final prices.

– Nicholas Stern, editorial associate

UAE Court System Still Needs to Develop Interpretations, Precedents for New Bankruptcy Law, Fitch Says

As the United Arab Emirates’ (UAE) new bankruptcy law is due to become effective at the end of the year, Fitch Ratings analysts believe courts’ interpretation of the law and how to handle bankruptcy proceedings will be key to its success.

The new law will apply to all companies established under the UAE’s commercial companies’ law, while companies established in the UAE’s free zones are not included because they have their own insolvency and bankruptcy laws.

“Existing UAE law defines how a court can declare a company bankrupt, appoint a trustee, realize assets and settle debts,” noted Bashar Al Natoor, global head of Islamic finance, and Mark Brown, senior analyst, both of the ratings firm. “But there has been no legal provision for the rehabilitation of distressed companies through creditor agreement, and the regime is largely untested.”

To date, debt restructurings in the UAE have been informal arrangements outside of the court system, in part because creditors see local courts as lacking the expertise to quickly and efficiently deal with these matters, analysts said. “When economically significant entities have experienced financial difficulties, the government has intervened, for example by introducing bespoke legislation when Dubai World rescheduled debt repayments in 2009,” Fitch said. “This has left some issues, such as whether courts can annul certain transactions by a borrower in the run-up to a declaration of bankruptcy, unclear.”

Moreover, it could take time for UAE courts to interpret and implement the new bankruptcy law—it is part of the reason why Fitch has yet to change its assessment of the UAE as a Group D jurisdiction in terms of assigning recovery ratings to debt instruments, the firm said. “Group D countries are generally jurisdictions where either the legal regime is less supportive of creditor rights, or the pursuit of a claim is highly likely to be hindered, for example by delays in bringing a claim to court, unpredictable judgments, or inconsistency in following due process.”

– Nicholas Stern, editorial associate

U.S. High-Yield Default Rate Set for 3% in 2017

The U.S. high-yield default rate is expected to finish 2017 at 3%, according to a new report from Fitch Ratings. U.S. energy defaults, after driving the rate in 2016 and currently at an 18.8% November trailing 12-month rate (TTM), also are predicted to reach 3% next year. Default volume for U.S. energy totals $39 billion so far this year.

U.S. defaults in 2017 will reach $36 billion, Fitch expects, an improvement compared to the $59 billion year-to-date, with no specific sector forecasted to propel the rate, as energy and metals/mining did this year.

The U.S. retail sector default rate is expected to climb to 9% from its current 1% TTM. Challenges driving some retailers into default include online competition, an increase in discounters, and a shift in consumer spending toward travel and entertainment. The retail sector carries a 4% weighting in the U.S. Fitch Default Index, so an increase in defaults would not significantly raise the U.S. rate.

Fitch expects health care/pharmaceuticals and utilities/power/gas combined to reach $5 billion in defaults next year. The two sectors experienced their first defaults of 2106 in December when 21st Century Oncology did not make its interest payment and Illinois Power Generating Co. filed for bankruptcy.

Radio broadcaster iHeart Communications, with almost $10 billion in bonds outstanding, represents the largest U.S. name on Fitch’s Bonds of Concern list. If a default should occur, the size of the debt would shift the default rate by .7%.

A total of $3.4 billion in defaults has already been recorded for December, more than the past two months combined. The current TTM U.S. default rate is 4.7%, up from 4.6% in November, Fitch said.

– Adam Fusco, editorial associate

S. Korea’s Strong Political Institutions, GDP Growth to Keep Sovereign Rating Stable

Political uncertainty in South Korea surrounding the impeachment of President Park Geun-hye will probably delay investment and disrupt consumer confidence, but Fitch Ratings analysts don’t expect to the turmoil to negatively impact the nation’s sovereign rating or overall economic activity.

The ratings firm affirmed Korea’s “AA-“ rating with a stable outlook in March and expects GDP growth of 2.5% to 3.0% in 2017 and 2018, which is higher than the 1.6% median rate for countries rated “AA-."

While the country decides whether to uphold Park’s impeachment, Fitch analysts see an opening for a presidential election to find Park’s replacement ahead of the December 2017 date that was originally scheduled.

Corporate restructuring passed in the nation’s 2017 budget is expected to weigh on GDP growth in the short term, but is likely to lead to a more productive allocation of resources over the long term, Fitch said. “The credit profile would be affected if the political situation were to develop in such a way that leads us to reassess governance standards,” Fitch analysts said. “It is possible that the strong public reaction to this scandal might eventually lead to weaker links between the state and the corporate sector, and a structural improvement in governance. However, changes in business culture are unlikely to happen quickly and require government support beyond the presidential election.”

– Nicholas Stern, editorial associate

Federal Reserve to Up Fed Funds Rate

For the first time this year, the Federal Reserve plans to raise interest rates 25 basis points to between ½% to ¾%, driven by a strengthening labor market and expanding economic activity since mid-year, according to a Fed press release.

From the Fed: “Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee's 2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of nonenergy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

“The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Outlook Positive for Global Aerospace and Defense Sector

The outlook for the global aerospace and defense sector is positive, with deliveries of large commercial aircraft expected to grow, Moody’s Investors Service said in a new report. Defense spending, after a multiyear downturn, is also set to increase.

“The long-running commercial aerospace supercycle has a bit more room to run, and defense is now picking up,” said Moody’s Senior Vice President Russell Solomon. “Aircraft manufacturer order books remain near all-time highs despite a slowdown in new orders, rising deferrals/cancellations and modestly lower aircraft retirement rates—all as expected.”

Solomon added that deliveries of large commercial airplanes, which have 120 seats or more, will likely grow from 6% to 8% next year due to demand from developing markets. Over the long term, however, supply chain risk remains, as original equipment manufacturers push for cost reductions and pursue an increase in production rates for single-aisle jets and the latest widebodies.

“In 2017, airlines will continue to benefit from steady passenger demand, relatively stable GDP rates and still-cheap jet fuel, all of which are broadly supportive of the coming production ramp,” Solomon said.

Defense spending is expected to rise from 3% to 5%, with the sector’s operating profit to grow from 4% to 6% globally in 2017. Growth prospects are good in the U.S., with expected bipartisan support for increases in defense spending and relief from budget caps. Rising security concerns and geopolitical risk should support the industry globally, according to Moody’s. Higher defense spending may come from countries that increasingly need to defend their own borders if U.S. support for allies is reduced. Heightened tensions related to such potential withdrawals, however, may also lead to reduction in purchases of U.S.-made equipment and services.

In an increasingly political environment, cost control will remain important, Moody’s said. Merger and acquisition activity is expected to continue.

– Adam Fusco, editorial associate

Improved Commodities Sector Will Boost Canadian Firms’ Shift to High-Yield Debt Market in 2017

A boost from the commodities sector, refinancing requirements, and heightened mergers and acquisitions activity will prompt Canadian businesses in 2017 to turn to the high-yield debt market at an increased pace.

"After a significant slowdown in 2016, we expect speculative-grade debt issuance by Canadian companies to increase towards levels of about US$30 billion, up from US$22 billion through November 2016," said Ed Sustar, a Moody's Investors Service senior vice president.
So far this year, the Canadian speculative-grade bond sector saw only 16 new deals compared to 27 the year prior, with the majority of these transactions taking place in U.S. dollars, Sustar noted.

“Moody's attributed the decline to a dearth of new deals from the country's energy and mining sectors, both of which were hindered by the drop-off in commodity prices,” he said.
Still, domestic market bond issuance for the five speculative-grade Canadian companies reached CA$910 million year-to-date, up from the two deals the year prior that totaled CA$625 million Moody’s said. As about CA$5 billion of Canadian-dollar high-yield bonds issued in the last six years need to be refinanced, Moody’s expects speculative-grade issuance to increase over the next two years.

“The median EBITDA interest coverage for Canadian speculative-grade companies has tapered off to an historic low of 2.5x as of September 2016, while median debt/EBITDA has improved slightly, to 5.1x, from an historic high in 2015 of 5.2x,” Moody’s said.

Further, Moody’s expects the Canadian default rate to decline over the next year and come more in line with the long-term average of about five defaults per year, Sustar said. “In addition, the speculative-grade liquidity profile of Canadian companies will improve over the next 12 to 18 months with higher refinancing activity and stronger cash flow generation.”

– Nicholas Stern, editorial associate

Tide for U.S. Steel Turns as Near-Term Outlook Goes Positive

The outlook for the U.S. steel industry for the next year and a half just flipped from negative to stable, and Moody’s Investors Service attributes rising prices, improved capacity utilization and falling imports as the main factors leading the charge.

Since reaching their nadir in October at roughly $470 per ton, hot-rolled coil prices have risen four times to $600 per ton. "We anticipate 2017 will continue to build on this year's advances and our price sensitivities range from $550/ton to $600/ton," said Moody's Senior Vice President Carol Cowan.

Along with rising prices, capacity utilization has also been on a steady march to improvement, reaching 68.9% for the week ending Dec. 3 and just below the 75% stable outlook trigger Moody’s has set. Still, the ratings agency expects capacity utilization to climb to a range between 70% and 74% in 2017.

And there’s been more good news for the sector: U.S. steelmakers have benefited from fewer steel imports as several anti-dumping trade cases concluded in the favor of the U.S. sector, Moody’s said. Year-over-year in October, steel imports dropped 19% to 27.5 million tons, while finished steel imports fell 19.8% to 22 million tons.

– Nicholas Stern, editorial associate

Earnings Growth Contributes to Stable Health Care Outlook

Stable fundamental business conditions for the next year-and-a-half are expected for global pharmaceuticals, U.S. medical products and devices, and U.S. for-profit hospitals, Moody’s Investors Service said in a new report. The ratings agency expects EBITDA (earnings before interest, taxes, depreciation and amortization) growth for each sector.

"Global demand for health care products and services will continue to rise," said Moody's Senior Vice President Michael Levesque; “however, rising health care spending creates budgetary pressures, driving ongoing cost-containment efforts. Payers will increasingly focus on cost effectiveness and value, and employers and insurers will place greater cost sharing on patients."

New product launches should drive incremental growth in the global pharmaceutical sector. Branded pharmaceutical prices are expected to rise at a slower pace in the United States, while the agency forecasts single-digit price declines in Europe and Japan.

Earnings growth from 2.5% to 3% in the U.S. for-profit hospital sector lead to Moody’s stable outlook, though high deductibles and copayments will increase the collection burden for health care providers. Rising bad debt expenses will weigh on EBITDA margins.

"Rising costs, including higher wages and pharmaceutical prices, will limit ability to improve margins given the slow pace of revenue growth," said Moody's Senior Vice President Dean Diaz.

Moody’s stable outlook for U.S. medical products and devices, with an estimated EBITDA increase from 3% to 3.5%, reflects solid growth from the release of new products, particularly in cardiology and orthopedics. Medical device manufacturers, however, may experience increasing pricing pressure with the shift toward value-based reimbursement for health care providers, Moody’s said.

– Adam Fusco, editorial associate

Supreme Court Hears Bankruptcy Case That Could Impact Structured Settlements

WASHINGTON—The U.S. Supreme Court heard oral arguments Wednesday on a case vital to the interests of trade creditors in bankruptcy cases, the ultimate ruling for which could potentially have wide-ranging effects on the rules governing litigation settlements in commercial bankruptcies.

The case, Casimir Czyzewski, et al. v. Jevic Holding Corp., et al., addresses the question of whether a bankruptcy court can authorize a distribution of settlement proceeds that violates the priority scheme in the Bankruptcy Code, despite the objection of priority creditors whose rights are impaired by the proposed distribution.

If the Court rules against the Third Circuit Court of Appeals and the United States Bankruptcy Court for the District of Delaware’s affirmation of a structured settlement in the case, it could be detrimental to unsecured creditors or those suppliers or vendors with 503(b)(9) claims, said Bruce Nathan, Esq., of Lowenstein, Sandler LLP of New York. A ruling to uphold the lower courts’ decisions would at least afford unsecured creditors in administratively insolvent cases the ability to hold on to some form of payment.

Czyzewski’s side argued that Congress made categorical judgments about the priority of distribution of estate assets to unsecured creditors in all bankruptcy cases. “No provision of the Code permits a court to circumvent those judgments via settlement, ‘structured dismissal,’ or any other mechanism outside a confirmed plan,” they said.

Jevic’s side argued that there’s nothing in the Bankruptcy Code that subjects settlements (as opposed to reorganization plans) to the absolute priority rule and that the circuit court conflict in the case is “illusory.” “There is not a single reported decision from any circuit holding that any provision of the Bankruptcy Code extends the absolute priority rule to settlements,” Jevic’s attorneys argued in briefs to the Supreme Court.

– Nicholas Stern, editorial associate

For more of NACM staff’s onsite coverage from Supreme Court arguments in the Czyzewski v. Jevic case, read this week’s edition of NACM eNews (available late Thursday afternoon by clicking here).

Outlook for North American Corporates Stable

The outlook for North American corporates in 2017 is stable, according to Moody’s Investors Service in a new report on the sector. Factors reflected in the ratings agency’s forecast include modest economic growth and downside risk, as well as ample system liquidity and accessible financial markets.

“Our stable outlook for North American corporates next year reflects an overall accommodative credit environment, with an easing corporate default rate,” Senior Vice President Bill Wolfe said. “But it also belies uncertainties and risks, with credit conditions influenced by a constantly adjusting global economic environment.”

Caution is still warranted, since negative momentum has been in place since mid-2011. Increasing uncertainty is likely to weaken credit conditions in North America next year. Factors influencing prices and terms include event-related risks amid G-20 countries in connection to uncertain policies, low and uneven economic growth in Europe, and an ongoing slowdown in China. The flow of credit, however, is expected to be supported by robust systemic liquidity and positive global growth.

Moody’s industry outlooks are mainly stable, with negative signals contained, though positive indicators are dependent on consumers and therefore fragile. The agency forecasts that U.S. GDP will grow 2.2% in 2017 and 2.1% the following year.

An atmosphere of expansionist monetary policies amid ample liquidity, though low-risk assets are scarce, is a factor in the availability of credit. Confidence and a stronger credit supply will depend on positive economic news, Moody’s said.

– Adam Fusco, editorial associate

China’s Banking Outlook Negative for 2017 with Slower Economic Growth Forecasted

The outlook for China’s banking system is negative for the next 12 to 18 months, as rated by Moody’s Investors Service, thanks to slower economic growth, increased corporate sector restructuring and elevated asset prices.

"Our baseline scenario assumes a further moderation in real GDP growth to 6.3% in 2017 from 6.7% in the first three quarters of 2016,” said Christine Kuo, a Moody's senior vice president. “In view of weaker demand for corporate loans and the Chinese authorities' stance to pursue corporate deleveraging, we expect credit growth to moderate as well."

"At the same time, we expect government support to remain strong for the major banks, reflecting the policy imperative of maintaining public confidence and systemic stability,” said Yulia Wan, a Moody's assistant vice president and analyst. “And, while we think that government support for smaller banks will become more selective following the implementation of the deposit insurance scheme, it will remain high for the larger regional banks."

The ratings agency also anticipates Chinese authorities will increase their efforts to slow the nation’s increasing level of corporate leverage over the next year and a half, which in turn could increase corporate default risk and loan restructurings in the near term.

Meanwhile, debt restructuring for distressed borrowers is likely to result in economic losses for creditors of various asset classes, including banks, Moody’s analysts said.

As liquidity conditions are likely to remain stable thanks to a supportive central bank, “we see limited room for further policy easing, given the policy focus shift towards deleveraging, containing risks from capital outflows, the steep rise in property prices and gradual increase in inflation,” analysts said. This situation could bring added risk to small- and mid-size banks that have grown reliant on wholesale funding to support longer-duration investments.

“Furthermore, profitability will be pressured as moderating economic growth, the adoption of a more conservative growth strategy by the major banks and the broad shift towards deleveraging constrain the banks' income prospects from lending,” Moody’s said. “Net interest income still accounted for around 70% of total revenue in the first three quarters of 2016.”

– Nicholas Stern, editorial associate

Corporate Liquidity Improves for the Seventh Consecutive Month in November

For the seventh month in a row Moody’s Liquidity-Stress Index (LSI) fell in November, indicating that corporate liquidity has improved. Yet while modest economic gains have served to reduce corporate liquidity difficulties, the majority of the index’s improvement has successful refinancing in a low-yield environment and default-related ratings withdrawals to thank.

The LSI, which rises when corporate liquidity weakens and falls when it strengthens, dropped to 6% in November from 6.6% in October, according to Senior Vice President John Puchalla. “Notably, the index's shift to its lowest level since September 2015 marks a significant retreat from the most recent peak of 10.3% in March 2016, and points to moderating default risk," he said.

The ratings firm’s forecast for the one-year U.S. spec-grade default rate is for it to fall even more next year to 4.1% by October 2017, Moody’s said.

Further, speculative-grade liquidity (SGL) ratings for 10 companies decreased in November, marking the end to a five-month trend that saw upgrades leading to downgrades, analysts said. “The impetus for the downgrades during the month—all by one notch—reflected a variety of reasons, including earnings pressure and maturities,” Puchalla said. The downgraded companies included firms from the health care, communications and manufacturing sectors.

– Nicholas Stern, associate editor

Market Rebalancing on the Horizon with OPEC Agreement

For the first time in nearly eight years, OPEC has agreed to cut oil production. This move, along with the potential of non-OPEC countries joining in the cut, should accelerate market rebalancing and increase the chances of a rapid oil price recovery, according to Fitch Ratings.

Implementation risks remain, however. OPEC’s adherence to the agreement may be in question, as well as the full cooperation of other participants, particularly Russia. Russia has already stated that it is prepared to cut production by up to 300 thousand barrels of oil per day (mbpd). OPEC has said that non-OPEC entities have agreed to cut by 600 mbpd. Combined with OPEC’s agreement to cut production by 1.2 million barrels per day, the total reduction would account for nearly 2% of global output.

Market oversupply could end just from OPEC’s commitment, with an expected decrease in OECD oil stocks throughout 2017. Fitch Ratings estimates that crude consumption may exceed production by 400 mbpd in the first quarter of next year, increasing to 1,300 mbpd by the fourth quarter of 2017 if the deal is extended past its initial six-month term. Without the deal, oil stocks would remain flat, which Fitch estimates are 300 million barrels above their five-year average.

There is no guarantee that OPEC members will agree to extend the deal. Another risk is that OPEC members will produce above their quotas. Unknown is how quickly the U.S. short-cycle crude production will react to higher oil prices.

Fitch has not changed its view on the long-term price of oil, for which its latest full-cycle cost estimate is $65 (USD).

– Adam Fusco, editorial associate