Just over a month ago, the total number of global defaults hit 100 according to S&P calculations, rising by 50% from the number of bankruptcies at this time last year and the highest level since the financial crisis. By total debt notional, some $154 billion had defaulted as of the mid point of the year, and extrapolating the trendline revealed something even more troubling: 2016 has a chance of being the year with the most defaults in history, surpassing even the 2009 financial crisis record.
One month later, we learn that another 13 companies have filed for bankruptcy protection, bringing the grand total to 113, matching the number of companies which defaulted globally in all of 2015.
According to Diane Vazza, head of S&P Global Fixed Income Research, “the default tally now equals the total number of defaults recorded in the entire year of 2015 and is 57% higher than the count at this oint in 2015. The last time the global tally was higher at this point in the year was in 2009 when it reached 208 during the financial crisis.”
The main culprit for the surge in defaults is the stubbornly low price of oil which is slowly but surely putting the most inefficient shale companies out of business. Indeed, much of the default pain is in the energy sector. Stocks in the energy and natural resources industries have accounted for 57% of defaults the past 12 months, S&P says
It's going to get worse: S&P also estimates that the U.S. corporate default rate is expected to jump 30% and hit 5.6% by June 2017. Financial stress applied mainly by falling oil prices is "a driver of defaults" and why 99 U.S. companies with the lowest credit ratings are expected to default in the 12 month period ending June 2017. That would be dramatically higher than the 79 U.S. companies that defaulted in the 12 months ended June 2016, which resulted in a 4.3% default rate, S&P Global says.
Meanwhile, the confusion between the soaring default rates and risk asset prices has stumped commentators such as Matt Krantz who points out that the latest default forecast, based on S&P's most likely scenario, is in stark contrast to the bullishness expressed in the stock market. The Standard & Poor's 500 has jumped more than 8% this year and is nudging up against record highs. While defaults are likely to rise, investors continue to be bullish on bonds as well as stocks. The difference between the yield on bonds with the lowest credit ratings and those with higher ratings fell to 5.6%. That's down from a 8.15% in mid-February.
As repeatedly noted on these pages, a key reason for the surge in junk bond prices is the recent intervention by both the ECB and the BOE, who have aggressively started buying up corporate debt and are forcing traditionally corporate investors to chase yield in the riskiest space, including single B and lower rated issuers. While so far the credit pain is centered mostly in the energy sector, and there "has been little spillover effect to other sectors" S&P warns: "We are not ruling out this possibility in the coming quarters."
That should post no problem to the central banks, however, who wil merely expand their mandate to buy anything that has a seller.
Finally, for those who can't believe what is taking place, fear not you are not alone: here are some parting words from Citi's own head of credit, Matt King, who is likewise stunned:
With macro this dominant, credit no longer seems bothered by defaults. S&P pointed out this week that YTD defaults have now equalled last year’s full-year total, and are running at their highest pace since 2009. Once upon a time, that would have been associated with spread widening. But not this year.
* * *
Unfortunately that gulf in world view runs so deep that we doubt anything anyone says will change it – even as central banks are increasingly admitting that their models aren’t working.
One day, the music will end, and until that day comes the central planners are doing their best to make sure that when it all comes crashing down, it will be one for the history books.