2016 Annual Global Corporate Default Study and Rating Transitions

S&P Global Ratings
Written By: Diane Vazza and Nick Kraemer
S&P Global Ratings
Written By: Diane Vazza and Nick Kraemer

The largely unexpected passage of the Brexit referendum in the U.K. and the election of Donald Trump in the U.S. dominated news headlines in 2016 and remain prime sources of potential investor risk. However in 2016 corporate defaults primarily resulted from by prolonged stress in global energy markets. Oil prices began 2016 at their lowest levels in roughly 14 years. Despite oil prices rising for most of the year, the energy and natural resources sector had increased default activity over an already elevated 2015, and the sector accounted for over 50% of all defaults in 2016. This helped push the corporate default count up to 162--the second consecutive year since 2009 with over 100 defaults (see Table 1). These 162 defaulted issuers accounted for $239.8 billion in debt, which is more than double the $110.3 billion total for 2015.

At the end of December 2016, the global speculative-grade default rate rose to 4.2%--its highest level since 2009 (when it was just under 10%) and just above the 36-year annual average of 4.1% (see Chart 7). Similarly to 2015, the increase stemmed largely from the much higher rate of defaults in the energy and commodities sectors. At the end of 2016, the global speculative-grade default rate excluding energy and natural resources was a much more modest 2.3%. Meanwhile, the speculative-grade default rate for the energy and natural resources sector was 21.1% by year-end, up from 9.8% in 2015.

Despite the increase in defaults, credit quality and rating stability measures remained generally in line with historical averages (see Table 6). For example, the ratio of downgrades to upgrades changed little relative to 2015, with slight increases in the quantities of both upgrades and downgrades. There were large clusters of downgrades in February 2016; these stemmed first from our downward revisions to our oil and natural gas prices assumptions and then from our sovereign downgrade of Brazil in the face of a continuing economic contraction and fiscal difficulties.

All of the defaulted companies in 2016 that were rated as of the beginning of the year (143) had a speculative-grade rating ('BB+' or lower) (see Table 1). Of the remaining 19 defaults, 10 were by companies that S&P Global Ratings first rated in 2016, and nine were by companies with ratings that we withdrew before the beginning of the year. Also, of the 162 defaulters, 154 (95%) initially had speculative-grade ratings, the majority of which (127) were from the 'B' and 'CCC'/'C' rating categories. We consider companies reemerging from a prior default to be separate entities from prior to default.

This study includes industrials, utilities, financial institutions (banks, brokerages, asset managers, and other financial entities), and insurance companies globally with long-term local-currency ratings. We calculated all default rates on an issuer-weighted basis.

Overview

  • In 2016, the number of defaults globally expanded to 162 from 113 in 2015. This pushed the global speculative-grade default rate up to 4.2% from 2.8% at the end of 2015. This increase came alongside an essentially static level of speculative-grade issuers in 2016. Compared to 2015, there was one fewer speculative-grade issuer at the start of the year, a marked decline after growth of 7%-12% for the previous five years.
  • The prolonged period of low oil and other commodity prices was the biggest factor behind the overall increase in defaults for the year. The energy and natural resources sector accounted for 51% of all defaults in 2016, a historical record and far outpacing the consumer/service sector, which followed at roughly 9.9%.
  • The one-year global Gini ratio rose to 87 in 2016, an increase over 83.6 in 2015 but slightly lower than the post-financial crisis average of 88.9. This was the second consecutive year that the 'CCC'/'C' category accounted for less than 50% of all defaults.
  • The overall rate of rating actions increased slightly in 2016 relative to 2015 and was very consistent with long-term averages across all categories. The downgrade rate increased to 12.2% from 11.8% in 2015, while the upgrade rate rose to 7.9% from 7.4%. The prime drivers of downgrades in 2016 were the revised oil and natural gas price deck assumptions and declines in credit quality following our sovereign downgrade of Brazil in February.
  • Consistent with past years, the U.S. continued to account for the majority of defaults globally in 2016 at 64.8%. This is the highest proportion of the total from the U.S. region since 2011, when 73.6% of all defaults originated there. Conversely, of the total issuers rated at the beginning of the year, the share from the U.S. continued to fall--to an all-time low of 47%.

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