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Analysis: Defaults may alarm high yield investors

Power linesLast year saw the highest amount of corporate defaults since 2009 and latest data indicates that 2017 may be another tough year for high yield investors.

There have already been five defaults this year, down from the same period in 2016, which saw nine defaults. But as three defaults this year came from the energy sector, it may indicate that a similar pattern will emerge.

Information from S&P Global Ratings showed that in 2016 the energy sector had the most corporate defaults, 66 of the total 162.

Of the three energy companies defaulting, two were from North America, which again shows that a repeat of 2016 may be happening, as the majority of energy sector firms that defaulted were based in North America.

However, S&P said that the oil and gas sector has recovered. The total number of distressed issues fell to 154 from 188, led by the oil and gas sector with the greatest percentage decrease in distressed issue count at 4.9%.

David Donora, head of commodities at Columbia Threadneedle, said 2017 could see a commodities bull market start following the dramatic crash in prices seen at the beginning of last year. In January 2016, oil prices fell below $30 a barrel, which Donora viewed as the end of the commodities bear market. He said that as demand was outstripping supply, it should support prices and returns for investors.

S&P said that the energy and natural resources sector contributed the most to the default rate in the past 24 months and “while we do not expect any meaningful increase in oil and natural gas prices in 2017, production costs of many exploration and production companies have fallen”.

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