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

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.