Despite the rear-view-mirror-gazing optimists proclamations that default rates have been low (which matters not one jot when pricing the future expectations of default into corporate bond cashflows), Fitch just released its forecast for 2016 defaults and notes that more than $5.5 billion of December defaults has increased the trailing 12-month default rate to 3.3% from 3% at the end of November, marking the 13th consecutive month that defaulted volume exceeded $1.5 billion, closing in on the 14-month run seen in 2008-2009.

“Investors are taking note that the lower-for-longer oil price scenario doesn’t look like it’s going away anytime soon,” said Eric Rosenthal, Senior Director of Leveraged Finance.

Corporate spreads for ‘CCC’ credits exceeded 1,600 bps on Friday for the first time since summer 2009. Energy and metals/mining compose $84 billion of the ‘CCC’ rating category. Spotty capital markets access for these companies has led to decreased issuance, and pricing suggests distress will continue.  Of ‘CCC’ rated energy and metals/mining companies, 88% are bid below 80 cents.

So far this month the energy TTM default rate climbed to nearly 7%. Vantage Drilling’s chapter 11 filing and Magnum Hunter Resources and Swift Energy’s missed payments pushed the E&P TTM default rate close to 12%.

Distressed debt exchanges (DDEs) accounted for 44% of defaults on an issuer-count basis in the past year. Energy companies have relied on DDEs to improve their capital structure and buy time as liquidity and cash flows are affected by low oil prices. Several companies including SandRidge Energy, Halcon Resources, Warren Resources and Exco Resources have completed multiple DDEs.

Fitch Ratings forecasts the 2016 US high yield bond default rate at 4.5% as weak prices will continue to challenge energy and metals/mining issuers. The energy sector default rate is projected to hit 11% in 2016, eclipsing the 9.7% rate seen in 1999.

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