Outlook 2018: Fitch, Moody’s and S&P expect default rates to decrease

By Caroline Salls

Pittsburgh, Dec. 29 – Fitch Ratings forecasts a “just over 2%” U.S. high-yield default rate for 2018, and Moody’s Investors Service predicts the global trailing-12-month default rate will slide to 1.8% by the end of 2018, according to reports released by the ratings agencies.

In addition, S&P Global Ratings said in a report released on Dec. 20 that it expects the U.S. corporate trailing-12-month speculative-grade default rate to decrease to 2.7% by September 2018 from 3.1% in September 2017.

S&P said the energy and natural resources and consumer/service sectors have been experiencing, and may continue to experience, heightened credit stress.

Meanwhile, S&P said it expects the 12-month default rate for speculative-grade-rated European financial and non-financial corporate issuers to remain at about 2% through the end of June 2018.

S&P said favorable European macroeconomic trends, including geographically balanced gross domestic product growth of 2%, accommodative monetary policy and low inflationary pressure, and credit conditions continue to support a low default rate.

Fitch forecast

Fitch said the U.S. high-yield default rate was poised to finish 2017 at its lowest level since March 2014.

“Unlike last year when energy and metals/mining contributed 84% of the $59.6 billion of defaults, there is no large sector in distress,” Fitch said in its December report.

“Retail produced only $2 billion of defaults (a 4.4% TTM rate) while energy and metals/mining accounted for $3.9 billion of combined volume. Telecommunications registered the most defaults at $3 billion, and all sectors total just $19 billion.”

Fitch said its 2018 U.S. default rate forecast is in line with the non-recessionary 2.3% average.

According to the Fitch report, broadcasting/media could generate roughly 40% of the total market default volume and post an 18% sector rate in 2018, but the sector default rate would fall to 2% without a default by iHeartCommunications Inc.

In addition, Fitch said retail default volume could double in 2018, with Claire’s Stores Inc., Sears Holdings Corp. and Nine West Holdings Inc. likely candidates. Fitch expects the energy default rate to be just 2% next year as the sector-default cycle wanes.

Moody’s projections

Moody’s said it expected the global default rate to end 2017 at 2.8%, before extending its descent into 2018.

“This favorable default outlook comes out of the backdrop of a growing economy, the continued recovery in the energy sector and a strong credit market, which continues to provide sufficient liquidity for spec-grade companies,” Moody’s Sharon Ou said in the agency’s release.

In the United States, Moody’s said it forecasts the speculative-grade default rate would fall to 3.2% at the end of 2017, with a further decline to 2.3% expected by the end of November 2018.

In Europe, Moody’s said the default rate was expected to finish at 2.3% in December 2017 before sliding to 1.1% by the end of 2018.

From a sector perspective, Moody’s said analysts expect the highest default rate in the media: advertising, printing and publishing sector in both the United States and Europe, followed by retail and cargo transportation, respectively.

Contrary to a falling speculative-grade default rates forecast for the United States and Europe, Moody’s said its global speculative-grade default rate ticked up to close out November at 3.0%.

Also, Moody’s said the number of loan defaults edged higher in November, with seven Moody’s-rated issuers defaulting in the leveraged-loan market for the month.

The trailing-12-month U.S. leveraged loan default rate rose to 2.0% in November from 1.7% the month before.

© 2015 Prospect News.
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