Moody’s, Kamakura Indexes Reveal Improving Default Rates

A downward trend continues in the trailing 12-month default rate among U.S. speculative-grade companies, despite a rise of U.S. nonfinancial defaults in the second quarter of 2017, according to a recent report from Moody’s Investors Service. The commodities sector accounts for the highest number of defaults, though problems in the sector are easing.

“We see a combination of cash flow that is bolstered by economic growth, good intrinsic company liquidity and fewer commodity sector strains fueling a drop in the U.S. speculative-grade corporate default rate to 2.8% a year from now,” said Moody’s Senior Vice President John Puchalla.

Companies in the retail sector continue to struggle with the change in consumer spending habits. Defaults are rising in that sector.

“The decline in brick-and-mortar store traffic, in conjunction with the shift in consumer spending to digital channels, is contributing to retail earnings weakness and increased credit strains this year,” Puchalla said. “Even so, retail defaults are not making up for the decline in commodity defaults, as the retail and apparel default rate—at 4.4% in the second quarter—remains well below the default rate for commodity sectors.”

A continued reduction in the default rate can be expected over the next year, the ratings agency said, as its Liquidity Stress Index dropped nearly two percentage points in the second quarter. Reduced risk of default and a boost to speculative-grade liquidity can be found in earnings growth and favorable conditions for refinancing and raising investment funds, Moody’s said. However, the default atmosphere is still vulnerable if the economy deteriorated or if geopolitical issues disrupted trade.

Meanwhile, the Kamakura troubled company index ended July with a decrease of nearly half a percentage point from the previous month. The decrease indicates improving credit quality. Among the 10-riskiest rated firms in July, seven were from the United States, two from Great Britain and one from Singapore, Kamakura said.

– Adam Fusco, associate editor

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