Moody's raises forecast for global junk defaults on prolonged commodity downturn

NEW YORK (BLOOMBERG) - Moody's Investors Service raised its forecast for global junk-bond defaults this year to 4.7 per cent, from an estimate of 4.2 per cent just a month ago, as a prolonged downturn in commodity prices continues to ravage corporate balance sheets.

"The corporate default cycle has turned and default rates are very likely to pick up and surpass the long-term averages," Moody's credit analyst Sharon Ou wrote in a March 8 report.

"This forecast is the outcome of shifting economic conditions as indicated by rising high-yield spreads, and deteriorating credit quality in sectors such as oil & gas and metals & mining due to stagnating commodity prices."

The ratings company forecasts the speculative-grade default rate to rise to the highest level since August 2010, when it reached 5.06 per cent. The current figure is 3.7 per cent.

Defaults are predicted to accelerate as commodity prices languish near the lowest levels in at least 25 years amid reduced demand for oil, metals and minerals as China's economy cools.

Global high-yield borrowing costs are near the highest levels in four years, according to Bank of America Merrill Lynch Indexes. Debt of US high-yield energy companies is down 28 per cent over the past year.