S&P expects U.S. junk default rate to fall to 2.6% by December 2018

By Caroline Salls

Pittsburgh, Feb. 13 – Standard & Poor’s expects the U.S. trailing-12-month speculative-grade default rate to decrease to 2.6% by December 2018 from 3% in December 2017, according to a report released Tuesday.

At the industry level, S&P said the energy and natural resources and consumer services sectors are still experiencing heightened credit stress, with energy and natural resources accounting for more than half of all U.S. defaults in 2016 and 30% in 2017.

While it expects some stress to continue for these two sectors, S&P said oil prices have rebounded and should remain relatively stable moving forward, and retail sales overall have been strong since September, supported by rising consumer confidence amid a strong job market.

S&P said the December passage of the revised U.S. corporate tax code law means “many changes are in store that could pose challenges for highly leveraged firms.” In addition, the ratings agency said the Federal Reserve tightened monetary policy in 2017 and is expected to raise interest rates further this year, with most expecting the first increase in March.

“Still, we feel many companies have come to market recently to get ahead of rising rates, and maturing debt totals in the next 12 months appear broadly manageable,” according to the release.

To reach its baseline default rate forecast of 2.6% for the 12 months ending December 2018, S&P said 46 speculative-grade issuers would need to default. In comparison, 53 speculative-grade entities defaulted in the 12 months ended December 2017.

In its optimistic scenario, S&P said the default rate would fall to 2.2% by December 2018, requiring 39 defaults in the trailing 12 months, and in its pessimistic scenario, the rate would finish the year at 3.8%, requiring 68 defaults.

S&P said it has increased the projection in its pessimistic scenario since the fourth quarter, listing its main concerns as potential negative effects from tax reform, higher interest rates spilling over to corporate borrowers, a sustained increase in market volatility and a potential decline in consumer sentiment, which could further impact the already challenged retail and consumer products segment.

© 2015 Prospect News.
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