The global corporate default tally rises to a total of 112 issuers in 2015

The global corporate default tally reached a total of 112 issuers in 2015 with addition of one default in the last week of the year-the highest year-end total since 2009 when it reached 242

Last week’s default by a Poland-based metals, mining, and steel company raised that sector’s default tally to 17 issuers (15% of the global total)–the second-highest sector concentration in the tally. The oil and gas sector led the 2015 default tally with 29 defaulters, or 26% of the global total. The consumer products and bank sectors are tied for the third-highest concentration at 13 issuers, or 12%, each.

Of the total defaulting entities in 2015, the U.S. dominates the list with 66 issuers, followed by emerging markets with 25, Europe with 16, and five in the other developed nations (Australia, Canada, Japan, and New Zealand).

Defaults in the emerging markets escalated in 2015, with the year-end tally of 25 defaults hitting its highest level in six years owing largely to a credit spillover effect of the increasingly unfavorable geopolitical climate in Brazil and Russia. Indeed, while the U.S. led defaults in 2015 with 66 issuers (59% of the global total), Brazil and Russia followed with eight defaults (7% of the global total) and seven (6% of the global total), respectively–the second- and third-highest default tallies of all other countries.

On Dec. 30, 2015, Standard & Poor’s Rating Services lowered its long- and short-term corporate credit ratings on Warsaw-based steelmaker Cognor S.A. to ‘SD/SD’ from ‘CC/C’ reflecting the outcome of Cognor’s tender offer through a modified Dutch auction of its senior secured notes via which the company will repay €6.96 million in the aggregate principal amount of the notes for an amount corresponding to 53.8% of their notional value. The offer expired Dec. 24, 2015.

In 2015, of the 112 defaulting entities, 36 defaulted because of distressed exchanges, 32 due to missed interest or principal payments, 22 after filing for bankruptcy, 11 reflected regulatory intervention, seven are confidential, one following a judicial reorganization and one a judicial recovery, one due to administration appointment, and one after completing a de facto debt-for-equity swap. In 2014, 21 of the 60 defaults were due to missed interest or principal payments, 18 reflected bankruptcy filings, 14 were due to distressed exchanges, four were confidential, one reflected regulatory supervision, one was due to a judicial reorganization, and one resulted from a creditor protection filing.

The number of global weakest links grew to 195 (as of Dec. 14, 2015) from 187 (as of Nov. 19, 2015)–higher than the previous peak in March 2010 when the count was 203. The oil and gas sector has the highest number of weakest links, at 34, followed by financial institutions at 33 (as of Dec. 14, 2015). Drops in oil prices affected the profitability of oil and gas companies, where spreads have widened considerably. This spread expansion has had a spillover effect upon the broader range of speculative-grade rated firms, where spreads have widened considerably leading to increased default risk. The U.S. distress ratio peaked for the year at 24.5% in December, compared with 20.1% in November. The oil and gas sector accounted for 127 of the 437 issues that make up the distress ratio. The metals, mining, and steel sector had the highest sector distress ratio at 81.6% and the second-highest number of issues, with 71.

Standard & Poor’s expects the U.S. corporate trailing-12-month speculative-grade default rate to rise to 3.3% by September 2016 from 2.5% in September 2015 and 1.6% in September 2014. While some stress appeared in late 2014 and throughout 2015 in the form of plunging oil prices and monetary policy tightening from the Federal Reserve, these factors have not yet produced a noticeable increase in defaults. By most measures, we believe increased defaults in the near future likely will be muted by historical standards, but the current crop of U.S. speculative-grade issuers appears fragile and particularly susceptible to any sudden or unanticipated shocks. From October 2015 through September 2016, 60 speculative-grade issuers would need to default to reach this projection; in comparison, 46 speculative-grade entities defaulted in the 12 months ended Sept. 30 2015, and 26 in the year-long period ended Sept. 30 2014. We expect the default rate to increase to 2.4% through September 2016 (44 defaults in the trailing 12 months) in our optimistic scenario and to rise to 4.8% (87 defaults in the trailing 12 months) in our pessimistic scenario.

Diane Vazza – Managing Director Global Fixed Income Research – Standard & Poor’s
Sudeep K Kesh – Senior Director Global Fixed Income Research – Standard & Poor’s
Nivritti Mishra Richhariya – Research Contributor – CRISIL Global Analytical Center (an S&P affiliate, Mumbai)