The Party’s Over for Corporate Bonds, as Moody’s Warns of Rising Def...

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Led by rising defaults in the energy and mining sectors, the default rate on corporate bonds this year is expected to hit its highest rate since the financial crisis, Moody’s said in a new report.

“In the past six years,” the report stated, “the global economy has enjoyed a benign default environment as accommodative monetary policies have fueled the corporate debt market with abundant liquidity, allowing many low-rated issuers to refinance when needed. The party is likely coming to an end soon as the global default rate is expected to approach the historical average mark by the end of 2016.”

The default rate for all corporate debt is expected to rise to 2.1%, Moody’s said. That is up from 0.9% in 2014 and 1.7% in 2015. It also would be the highest default rate since the 2008-2009 crisis. If the rate is realized, it would translate to 138 defaults this year, up from 109 in 2015 (a 30% increase) and 55 in 2014.

The bulk of that is coming from speculative-grade issuers. The default rate for junk bonds in 2016 is expected to hit 4%, up from 1.9% in 2014 and 3.5% in 2015. Interestingly enough, that 4% rate isn’t historically high; rather, it’s just under the average since 1983 of 4.2%.

It’s no surprise that the increase is being mainly driven by commodity-related sectors, unlike during the financial crisis, when default were spread across industries. “Last year’s defaults reflected sector-specific problems, leading to a high concentration of defaults in particular pockets,” the report said. Oil and gas saw 30 defaults in 2015, about 28% of the total. Its default rate was 6.3%. Metals and mining had 13 defaults, and a default rate of 6.5%. The banking sector had 20 defaults, the “vast majority” of which were in Greece, Ukraine, and Russia.

“Our default rate forecasting models confirms that commodity sectors will remain in significant distress in 2016,” the report said.

Even for companies that won’t default, there’s been a marked deterioration in ratings, the firm said. Downgrades outpaced upgrades in 2015, leading to a “rating drift,” a degree of how many notches ratings fell, of negative 8.5%, far wider than the -0.7% drift in 2014. The worst drops came in oil and gas (-70%) and metals & mining (-65.6%).