Moody’s Mood? Gloom And Doom

The downturn in commodities has rippled across all asset classes, especially the credit markets.

There’s no light at the end of the tunnel, either, as Moody’s Investors Service sees more negativity ahead.

On February 4, Moody’s presented its findings in a panel sponsored by the Fixed Income Analysts Society (FIASI), entitled “Commodity Downturn Intensifies.”

According to Group Credit Officer Mariarosa Verde, the commodity crisis is occurring during a more mature credit cycle. That means growing stress among commodities poses a great danger to the cycle itself.

After several years of declining commodity prices, the pace of deterioration has accelerated in recent months. Plus, a disappointing outlook for global economic activity coupled with slowing demand from China means supply and demand won’t be rebalanced anytime soon.

The futures markets serve as a chilling indicator. Forward curves of most commodities are flat, supporting Moody’s view that this downturn will last a long time.

Meanwhile, investor exposure to the commodities sector is significant, a result of surging global debt sold to finance capacity expansion in recent years.

Needless to say, the price collapse in commodities has profoundly impacted the credit quality of oil and gas as well as metals and mining companies, culminating in numerous downgrades.

In fact, oil and gas and metals and mining companies account for half of non-financial speculative grade defaults in 2015.

And Moody’s believes that credit quality will deteriorate even further this year, exacerbated by sharply lower expectations for commodities prices over the next few years.

In January alone, Moody’s placed an additional 102 energy and 55 mining companies under review for downgrade.

One main reason is that hedging agreements are set to expire this year, liquidity cushions are eroding, and access to capital remains limited. More companies will need to restructure untenable debt through a combination of distressed exchange transactions or bankruptcy filings.