Corporate defaults “nearing financial crisis levels”

The number of corporate defaults has reached the ‘milestone’ of 100 so far this year, a figure not seen since the aftermath of the financial crisis in 2009.

According to ratings agency Standard & Poor’s (S&P), the current number of defaults is 50% higher than the same time last year.

Diane Vazza, head of fixed income research at the firm, said: “The last time the global tally was higher at this point in the year was in 2009 when it reached 177 during the financial crisis.”

Of the 100 defaults that have taken place this year, the majority have occurred in the US (67). Historically, financial institutions have generally accounted for most of the distressed companies – but in 2016 the oil and gas sector took the lead with 55 companies versus 29 for financial institutions. Vazza said this was “not surprising given the extended period of stress on commodities”.

S&P is not optimistic for the future of the energy sector. It states that stress in the form of persistently low prices for oil and other commodities, the potential for more rate hikes by the Federal Reserve, and financial market volatility abroad will likely produce more defaults in the next 12 months.

S&P said there is potential for “overspill” from the energy industry into other sectors. This is bad news for investors in US high yield, as the energy sector makes up a substantial percentage of the US high yield index, at about 12%.

Although the European high yield market is not as impacted by its exposure the energy sector, S&P warned that sharply falling commodities prices, slowing global growth, and significant market volatility all pose potential threats to ongoing credit stability.

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