Defaults for U.S. speculative-grade, non-financial companies were down in the first quarter, with default rates hitting their historic average of 4.7%. And with consistent economic growth, recent refinancing activity and improvement in commodities, analysts with Moody’s Investors Service project the default rate will drop to 3.0% in a year.
"The number of U.S. speculative-grade defaults slipped to a two-year low in the first quarter of 2017," said Moody's Senior Vice President John Puchalla. "Recent refunding activity is helping to mitigate the effect of higher interest rates, alongside continued easing of strains in the commodities sector, even as oil and gas defaults remain elevated relative to other sectors."
Ten U.S. non-financial defaults were reported in the first quarter, down from 15 during the prior quarter, which represents the smallest number since the beginning of 2015, Moody’s Puchalla said. Four of the firms that defaulted in the first quarter were in the oil and gas sector, which is well below the 17 companies in the sector that defaulted in second quarter of 2016. Exploration and production companies made up three of the recent defaults. Moody’s predicts that liquidity and ratings trends point to more defaults among oilfield service companies later this year.
Moody’s Liquidity Stress Index (LSI) decreased to 5.3% in March from a six-year high of 10.3% a year prior. Economic growth is providing good cash flow, and a blooming energy recovery and “covenant-lite” loan structures are helping to ease liquidity and default risks for spec-grade companies in the U.S. Still, the energy LSI remains high at 12.9%.
"A large number of low-rated companies are managing to get by with weak balance sheets because their liquidity is keeping them afloat," Puchalla said. "While we expect economic growth to quicken in the next year, a risky speculative-grade borrower rating distribution will sow the seeds for more defaults if economic growth is unexpectedly weak, geopolitical issues disrupt trade flows or accessing the capital markets becomes more difficult."
– Nicholas Stern, senior editor