US corporate defaults to hit six-year high in 2016, Moody's says

The US speculative-grade default rate will likely climb to a six-year high of 4.4% in 2016, as the drop in prices continues to pressure cash flows in commodity sectors, according to Moody’s.

In a note to clients on Monday, the ratings agency said the speculative-grade default rate rose to 3.2% from 2.7% in the fourth quarter of 2015.

Giving details, Moody’s said in the fourth quarter specifically, nine of the 15 US non-financial corporate defaults were oil and gas companies. Metals and mining had the second highest sector default count at seven in 2015, further demonstrating that falling prices are straining the cash flow and liquidity of commodity-based companies.

Defaults in non-commodity sectors were up only slightly to 24 in 2015 from 21 in 2014. Positive economic growth, modest 2016 maturities, and a lack of widespread covenant issues continue to support liquidity and contain the number of defaults.

John Puchalla, analyst at Moody’s, said, "On the back of the oil price slump, defaults were most concentrated in the oil and gas industry in 2015 due to weakening cash flows. We expect oil and gas, along with other commodity sectors, to continue to push the default rate higher in 2016."