S&P expects U.S. junk default rate to increase to 5.6% by June 2017

By Caroline Salls

Pittsburgh, Aug. 18 – Standard & Poor’s expects the U.S. corporate trailing-12-month speculative-grade default rate to increase to 5.6% by June 2017 from 4.3% in June of this year, according to a report released Thursday.

S&P said continued stress from the sustained decline in oil prices will likely remain a driver of defaults, though offsetting that slightly is the increased likelihood of the Federal Reserve delaying any interest rate hikes in the coming quarters.

Additional stress in Europe following the June 23 Brexit vote will likely also have a modestly positive impact on U.S. borrowers, as they may be seen as less risky than their European peers, the release said. However, S&P said this benefit may be limited to secondary markets.

To reach the baseline default rate forecast of 5.6% for the 12 months ending June 2017, 99 speculative-grade issuers would need to default. In comparison, S&P said 79 speculative-grade entities defaulted in the 12 months ended June 2016.

In its optimistic scenario, the agency said it expects the default rate to remain at 4.3% through June 2017, requiring 76 defaults in the trailing 12 months, and in the pessimistic scenario, the default rate would rise to 7.1%, calling for 125 defaults in the trailing 12 months.

S&P said about $30.4 billion of outstanding speculative-grade debt will mature in the second half of 2016 and about $135 billion in 2017, although part of this sum may have already been refinanced.

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