Fitch has increased its 2016 US high yield bond default forecast to 6%
from 4.5% as a function of continuing challenges in the energy and
metals/mining space. These sectors are likely to garner $70 billion in
defaults this year. Defaults totaling nearly $18 billion in these
sectors already occurred this year, including $13.7 billion from Pacific
Exploration & Production, SandRidge Energy, Arch Coal and Energy XXI.
Fitch's revised forecast signals the highest non-recessionary rate since
the 5.1% mark posted in 2000.
Fitch expects the energy trailing 12-month (TTM) default rate to surpass
20% during 2016. Energy default volume totals $13 billion this year
versus $17.5 billion for all of 2015. The March energy TTM default rate
is approaching 10%, up from 8% at the end of February and above the 9.7%
mark in 1999 when oil prices averaged $19.
While crude oil prices have advanced more than $11 since its February 11
low, the bids on bonds of weaker E&P companies, in particular, have
failed to gain much traction in the secondary market. Currently $77
billion of energy bonds are bid below 50 cents. Energy accounts for 19%
of the high yield market. In addition, several semiannual interest
payments are due over the next month. Recently, SandRidge, Energy XXI
and Chaparral Energy elected to not make their interest payments, and
their 30-day cure periods expire later this month.
Fitch forecasts the E&P sub-sector default rate to finish 2016 in a
30%-35% range while metals/mining is projected to reach 20%, and the
coal sub-sector at an astounding 60%. Fitch expects the E&P and
metals/mining March TTM rates to be roughly 19% and 14.5%, respectively,
up from 14.1% and 13.9% at the end of February.
Defaults in the rest of the high yield market remain below average; we
forecast the default rate excluding energy and metals/mining to end 2016
in a 1.5%-2% range, below Fitch's nonrecessionary 2.2% average. The
March TTM non-energy, metals/mining default rate remains under 1% after
finishing the prior month at 0.9%.
The past six energy defaults have involved missed interest payments
while a few outstanding distressed debt exchange offers (DDEs) are
struggling in the market, perhaps signaling that smaller-scope DDEs are
no longer able to buy companies time in the lower-for-longer oil price
environment.
Seven defaults have already taken place in March on the heels of 13 in
February, which recorded the most defaults since June 2009. Fitch
expects the March TTM rate at 3.4%, up from 3% at the end of last month.
The $21 billion in year-to-date defaults is below the $26 billion and
$39 billion tallied in the first quarter of 2002 and 2009, respectively,
but above the $18 billion seen last year when Caesars Entertainment
Operating Co. propelled the total. Overall, Fitch is forecasting just
under $90 billion in 2016 defaults.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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