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Oil, gas sector defaults expected to continue to mount

Apair of new reports from Fitch Ratings and S&P Global Ratings illustratethe dire situation of the oil and gas sector, with producers pushing bonddefaults to levels not seen since the financial crisis.

Accordingto Fitch, the trailing 12-month U.S. high yield bond default rate closed thefirst half of the year at 4.9%, the highest level since May 2010. The $50.2billion of defaults during the first half of the year has already surpassed the$48.3 billion total for all of 2015, and Fitch said defaults are on track toreach $90 billion by the end of 2016.

Theenergy sector is the largest problem, with $28.8 billion of defaults in thefirst half. "Despite the run up in prices since the February trough, therewill be additional sector defaults, with Halcon Resources expected to fileimminently," Fitch said.

EricRosenthal, the senior director for Leveraged Finance at Fitch, said the onlyquestion for the energy sector is how bad things will get.

"Thecombination of high energy and metals/mining default rates and lower year todate issuance has been a one-two punch for the high yield bond market thisyear," he said. "The question going forward is whether macro eventswill disrupt markets and restrain issuance for the remainder of the year."

Inits report, S&P said its list of "weakest links" — issuers ratedB- or lower with either negative rating outlooks or ratings on CreditWatch withnegative implications — reached a historical high of 245 in June, up three fromMay. The last time the list was larger, the firm said, was November 2009.

"Theoil and gas sector accounted for the most weakest links, with 59 (24%),followed by financial institutions with 33 (14%)," S&P said. "Weakestlinks among the oil and gas sector remain high because of an extended period ofstress on commodities. Of the 20 new weakest links, nine were from the oil andgas sector and eight were based in the U.S."

S&Psaid many of its "weakest links" had already defaulted, with morelikely to default within the next quarter. Historically, the firm said, being aweakest link has meant chances for a rebound have been slim.

"Weakestlinks account for a large proportion of defaults relative to allspeculative-grade issuers, particularly during periods of economic stress.During the 2001-2002 economic downturn, more than half of the weakest linksdefaulted within 12 months, and nearly 65% defaulted within three years,"the firm said. "By contrast, about 10% of all speculative-grade-ratedissuers defaulted within 12 months, and about 23% defaulted within three years."

S&P Global Ratings andS&P Global Market Intelligence are owned by S&P Global Inc.