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S&P European High Yield Default Rate Could Hold at 2%

S&P Global Ratings said today that it expects the 12-month default rate for speculative-grade European financial and nonfinancial corporate issuers that it rates to remain close to 2.0% by the end of June 2018, continuing the recent trend (see “The European Corporate Speculative-Grade Default Rate Should Remain Close To 2% Through June 2018”). This forecast remains significantly below the average 12-month trailing default rate of 3.2% between January 2002 and June 2017.

european hy default rate

“European macroeconomic trends and credit conditions continue to support a low default rate,” according to the agency. “For example, eurozone GDP growth will likely reach 2% in 2017 and is becoming more geographically balanced. Monetary policy should stay accommodative, as inflationary pressures remain low. And debt issuance from speculative-grade European corporates has been increasing, while the European Central Bank’s (ECB) survey on lending standards suggests that credit conditions for large firms continue to loosen on aggregate.”

S&P Global goes on to say, however, that some credit factors are more negative. S&P Global expects a more moderate growth trajectory for the U.K., as Brexit uncertainties dampen investment and higher inflation curbs household spending. In addition, its ratings-based indicators of European credit performance present a mixed picture. While the negative ratings bias among speculative-grade corporates has been stable in recent months, the ratings distribution is becoming more concentrated on lower rating levels, suggesting rising aggregate credit risk, S&P Global comments.

Based on credit-related and macroeconomic factors, S&P Global believes the default rate should remain low over the coming months. S&P Global determines its default rate forecast for speculative-grade European financial and nonfinancial corporates based on a variety of quantitative and qualitative factors.

“Projecting to the end of June 2018, we expect the 12-month trailing default rate for speculative-grade European financial and nonfinancial corporates will remain at about 2% in our baseline scenario, with 13 issuers defaulting,” S&P Global says. Under its optimistic scenario, the speculative-grade default rate would be 1.0% (six issuers), while in its pessimistic scenario, the default rate would be 3.2% (20 issuers). — Luke Millar

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S&P: As Risk, Defaults Rise in Retail, Expect Recoveries to Lag other Sectors

Amid sector challenges and rising defaults, default-related losses are likely to be higher in retail than in other sectors, especially for creditors that are either unsecured or have junior-lien positions, according to a new report published by S&P Global Ratings on Thursday.

Furthermore, with retailers historically showing a higher tendency to liquidate rather than reorganize after default, a separate report also finds that recovery prospects in a liquidation scenario are often dramatically lower than when a company continues to operate. This is because most retailers are asset light, meaning most creditors are highly dependent on profitability and cash flow as a source of repayment.

retail recoveryThe overall credit environment is generally improving amid mostly favorable economic conditions, including modest but steady GDP growth, low unemployment, tame inflation, and healthier household balance sheets. This environment—and more stable oil and gas prices—has contributed to a sharp decline in the speculative-grade default rate, which has dropped from 5.1% at the end of 2016 to 3.8% at the end of June, and now stands below the historical long-term average of 4.3%.

In contrast, distress and default levels are rising in the retail sector, with factors such as adapting to online retailing, rising competition, and shifting consumer tastes and spending habits contributing to the struggles.

In terms of trouble ahead, 18% of U.S. retail ratings are in the CCC category or lower, about double the level at the beginning of the year.

Meanwhile, the market is also signaling concern with the distress ratio —the share of speculative grade issues with option-adjusted spreads more than 1,000 bps above Treasuries—rising to 21% for the retail sector, well above that of the oil and gas sector, which has the next-highest distress ratio for a non-financial sector at 14%.

In the post-default scenario, overall recovery prospects for creditors to U.S. retailers are much lower than those for the greater domestic corporate universe, especially for creditors that are either unsecured or have junior-lien positions.

In the event of liquidation, estimated recoveries in the retail sector would be about 50% lower than going-concern recoveries on average. The full reports entitled “U.S. Retail Debt Recoveries Likely To Be Below Average Amid Sector Challenges And Rising Defaults“, and “U.S. Retail Recovery Prospects: Liquidation Could Lead To Worse Recovery Outcomes,” are available at www.globalcreditportal.com and at www.spcapitaliq.com. — Staff reports

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Private Equity Companies Gamble on Oil and Gas Defaulters—S&P Global

Given the apparent bottoming out of the decline in oil prices, improving credit conditions in the oil and gas sector, and the favorable financing conditions across markets currently, many distressed oil and gas companies appear to be a high-return bet.

However, risks do exist, and adding more debt to these firms’ existing loads may prove costly if interest rates rise, if the larger U.S. or European economy dips into recession, or if oil prices once again decline, S&P Global Fixed Income Research warned in a report this week.

The drop in oil prices that began in the second half of 2014 was particularly hard felt among U.S.-based shale oil producers, as this relatively expensive extraction method proved unsustainable amid an approximate 80% drop in oil prices.

“The speculative-grade default rate has risen in recent years primarily due to disproportionate stress in the energy and natural resources sector, where oil and gas companies have been struggling with falling revenue due to lower oil prices,” said Diane Vazza, head of S&P Global Fixed Income Research.

Private equity defaulters story table 2 2017-07-11(1)Moreover, many recent defaulters in the oil and gas sector have gained extra funding sources via private equity companies taking out ownership.

Recovery prospects
In terms of recovery prospects, bond prices for defaulting U.S.-based firms with private equity ownership do show some interesting distinctions among sectors. In the energy and natural resources sector, the average bond prices leading up to default were generally lower than those in other industries. But these same firms’ average bond prices were generally higher a month after default.

Generally, favorable recent bond prices for the oil and gas segment are in line with or slightly better than historical recovery rates.

The full report can be found here ($). — Rachelle Kakouris

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S&P: YTD Global Corporate Defaults Total 39, with 2 Consumer Prodcuct Cos. this Week

U.S. clothing concern Rue21 and Croatia-based retailer Agrokor missed interest payments this week, bringing the global corporate default tally so far in 2017 to 39, according to S&P Global Fixed Income Research. That’s down from 62 defaults at this point in 2016.

 

corporate high yield defaults

Despite the two retail defaults, the global speculative default rate dipped for the third straight month, to 3.7% as of March 31, from 3.9% the previous month. The rate remains elevated compared to a year ago, when it was 3.1%, according to S&P.

This analysis was written by S&P’s Dian Vazza, Sudeep Kesh, and Nicole Serino. The full analysis is available via S&P Global Fixed Income Research.

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Global S&P Default Tally Grows to 136 Courtesy Oil & Gas additions

global default tally

The 2016 global corporate default tally climbed to 136 issuers after three Oil & Gas companies defaulted this week, according to S&P Global Fixed Income Research. Oil & Gas companies account for 57, or 42% of the 136 defaults.

Of the 136 defaults so far this year, more than half (57%) have come from the Energy and Natural Resources sector. As of Aug. 31, 2016, the global speculative-grade default rate for Energy and Natural Resources was 17.9% compared with the global speculative-grade default rate for all other sectors of only 2.4%.

The default tally in 2016 has already surpassed the 113 defaults in full-year 2015 and now stands at its highest point since 2009, when it reached 236 during the financial crisis. The default count is 53% higher than it was at this time in 2015.

The new additions to the default list include Oil & Gas exploration and production company Bonanza Creek. S&P Global Ratings lowered its corporate credit rating on the Denver-based company to D, from CC, following the issuer’s missed interest payment on its 6.75% senior unsecured notes due 2021.

S&P Global also lowered its long-term rating on U.K.-based EnQuest PLC to Selective Default (SD), from B–, after the issuer failed to make its interest payment due Oct. 17, 2016, on its $650 million notes, while Nigeria-based oil-and-gas exploration-and-production issuer Seven Energy International’s corporate credit rating was lowered to D, from CCC– at S&P Global, after the issuer missed the interest payment on its $300 million and $100 million senior notes issues.

S&P Global expects the U.S. corporate trailing-12-month speculative-grade default rate to rise to 5.6% by June 2017 from 4.3% in June 2016 and 2.0% in June 2015, and the 12-month default rate for speculative-grade European financial and nonfinancial corporate issuers to rise to 1.8% by June 30, 2017, up marginally from 1.6% in 2015. A copy of the full report is available here via the S&P Global Credit Portal. — Rachelle Kakouris

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With PetroQuest, That’s 133 Defaults So Far in 2016

high yield default rate

The global speculative-grade default count has climbed to 133 so far in 2016, with PetroQuest Energy the latest issuer to join the list, according to S&P.

Defaults so far in 2016 already have topped the 2015 full-year total of 113. As is brutally clear in the chart, the energy sector has struggled most this year, with 71 of the 133 global defaults (53%).

Looking ahead, S&P Global Fixed Income Research expects the U.S. high yield default rate to increase to 5.6% by June 2017. It was 4.3% in June 2016.

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The full analysis is available to S&P Global Credit Portal subscribers. It was written by Diane Vazza, Sudeep Kesh, and Nicole Serino.

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S&P: Speculative-Grade Default Rates Hit 6-Year High

high yield default rate

The U.S. speculative-grade default rate has hit a six-year high of 4.79%, while the global default rate has crept to 4.04%, also a six-year high, according to S&P Global Fixed Income Research.

Of course, the long-troubled energy sector plays a major role here. Excluding energy and natural gas companies, the U.S. default rate drops to 2.44%.

Looking ahead, S&P says the number of ‘Weakest Links’ – issuers rated B- or lower, with either a negative outlook or implication – grew to 249 as of Sept. 20, the second-highest total since 2009.

The full analysis is available to S&P Global Credit Portal subscribers. It was written by Diane Vazza, Sudeep Kesh, Gregg Moskowitz, and Nicole Serino.

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S&P: 5 Defaults This Week Brings 2016 Total to 127

global corporate defaults

There were five global corporate defaults over the past week, bringing the year-to-date total to 127, compared to 79 at this point in 2015, according to S&P Global Fixed Income Research.

Defaulting over the past week:

  • Golfsmith International – retail golf equipment
  • Basic Energy Services – oil & gas
  • Chesapeake Energy – natural gas
  • Claire’s Stores – retail/teen accessories

The other issuer to default during the week is termed confidential by S&P.

This analysis is part of S&P Global Fixed Income’s weekly default analysis, which also details default by sector, a list/xls of 2016 defaults, and other analysis. It is available to S&P Global Credit Portal subscribers here.

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S&P: Global Corporate Default Tally Rises to 122

hy defaults by region

The global corporate default tally has increased to 122 as four issuers – all from the U.S. – defaulted over the past week, according to S&P Global Fixed Income Research.

The recent activity keeps 2016 well ahead of the 2015 pace – there were 79 defaults at this point in 2015 – though well behind the dark days of 2009, when there already were 220 defaults by this point in the year. – Tim Cross

This chart is taken from a longer piece of analysis by S&P Global Fixed Income Research. It was written by S&P’s Diane Vazza, Sudeep Kesh, and Nicole Serino. It is available to Global Credit Portal subscribers here

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S&P: 2016 Global Corporate Default Tally 50% Ahead of 2015 Pace

hy defaults

The global corporate default tally has increased to 118 in 2016 after U.S.-based metals and mining company American Gilsonite missed an interest payment this week, according to S&P Global Fixed Income Research.

The default tally is now 51% ahead of the pace established last year.

Of course, the energy/natural resources sector is the largest contributor of defaults this year, comprising roughly 57%. The bulk of entities defaulting – 76% – are domiciled in the U.S. – Tim Cross

This chart is taken from analysis available to S&P Global Credit Portal subscribers. It also details speculative-grade default rates (energy vs. all), defaults by region, and a YTD list of defaults (with an xls for each chart). It was written by Diane Vazza, Sudeep Kesh, and Nicole Serino

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