Brexit won’t trig­ger spike in de­faults; Com­modi­ties sec­tor to re­main stressed

Financial Mirror (Cyprus) - - FRONT PAGE -

The global spec­u­la­tive-grade de­fault rate con­tin­ues to climb, driven by the stress that low com­mod­ity prices are putting on is­suers in the sec­tor, ac­cord­ing to Moody’s In­vestors Ser­vice. The U.K.’s de­ci­sion to leave the Euro­pean Union is un­likely to have a sig­nif­i­cant im­pact on cor­po­rate de­faults, at least in the near fu­ture.

Moody’s global trail­ing twelve month spec­u­la­tive-grade de­fault rate closed at 4.5% in the sec­ond quar­ter, up from 4.0% in the prior quar­ter and from 2.5% a year ago. Moody’s ex­pects that the rate will rise to 4.9% by the end of the year, fall­ing to 4.2% in a year from now.

While the UK’s de­ci­sion to leave the Euro­pean Union re­sulted in no­tice­able volatil­ity in the global eq­uity mar­kets, Moody’s does not ex­pect it to trig­ger a sharp spike in cor­po­rate de­faults. Most cen­tral banks are keep­ing ac­com­moda­tive mon­e­tary poli­cies post-Brexit to en­sure cap­i­tal mar­kets have suf­fi­cient liq­uid­ity.

“Even so, we have less rea­son for op­ti­mism within the com­mod­ity and re­lated sec­tors,” said Sharon Ou, a Moody’s Se­nior Credit Of­fi­cer. “These are

be­fore ex­pected to re­main un­der stress.”

The US spec­u­la­tive-grade de­fault rate rose to 5.1% in the sec­ond quar­ter, up from 4.4% in the first. The rate is the high­est since Au­gust 2010 and is ex­pected to reach 6.4% by the end of the year.

Low prices of oil and gas, as well as other com­modi­ties, will help push the de­fault rate for US oil and gas com­pa­nies to 8.6%, and 10.2% for met­als & min­ing is­suers over the com­ing year.

The global cor­po­rate de­fault tally in­creased to 88 for 2016 af­ter 48 Moody’srated is­suers de­faulted in the sec­ond quar­ter. Most of the sec­ond quar­ter’s de­faults were in com­mod­ity sec­tors: Twenty three in Oil & Gas and six in Met­als & Min­ing. This is sim­i­lar to the first quar­ter which had 40 de­faults with 17 in the Oil & Gas sec­tor and eight in Met­als & Min­ing. By com­par­i­son, there were only 49 de­faults in the first half of 2015.

In Europe, the de­fault rate edged down to 2.4% from 2.5% with six de­faults in the sec­ond quar­ter. Moody’s pre­dicts that the de­fault rate in Europe will con­tinue to fall, drop­ping to 1.9% by the end of the year.

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