Rise in corporate defaults bad news for high yield

Wheat fieldThis year has had the highest number of corporate defaults to date since the aftermath of the financial crisis in 2009. Investors in high yield bonds have reason to worry.

According to US ratings Standard & Poor (S&P), there have been a total of 46 defaults this year globally. The majority (36) have occurred in the US, with declining commodity prices weighing heavily on oil and gas producers and miners. This sector accounted for around half of US defaults.

Companies such as Peabody Energy, Midstate Petroleum Company and Linn Energy have all missed interest payments. “The drop in oil prices has affected the profitability of oil and gas companies, where spreads have widened considerably, and has had a spillover effect on speculative-grade companies as a whole,” said Diana Vazz, managing editor at S&P.

The report added that stress in the form of persistently low oil prices, the tightening of monetary policy by the Federal Reserve for the first time in nine years, and slowing global growth likely will produce more defaults in the next 12 months.

Funds Europe reported on the US high yield market this month with Thomas O’Reilly, high yield bond manager for Neuberger Berman, predicting a rise in default rates to 6% this year in the asset class.

S&P is slightly more optimistic, predicting a default rate of just under 4% for the year among “speculative grade” (high yield) companies.

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