Corporate Defaults Expected to Soar, Weak Consumer Data Emerges

Expectations of corporate bankruptcies and debt defaults have skyrocketed, with America’s companies struggling to stay afloat.

Credit research firm, Fitch Ratings, has increased its high yield bond default prediction for 2016 by 33%, now saying that the high yield bond market, also known as the “junk bond” market, will see default rates of 6%, significantly higher than the historical average and about 300% higher than in 2015.

Expectations of corporate bankruptcies and debt defaults have skyrocketed, with America’s companies struggling to stay afloat.

Credit research firm, Fitch Ratings, has increased its high yield bond default prediction for 2016 by 33%, now saying that the high yield bond market, also known as the “junk bond” market, will see default rates of 6%, significantly higher than the historical average and about 300% higher than in 2015.

Fitch’s analysis was particularly negative on energy companies, noting that defaults are expanding to larger and larger firms. The broad energy, metals, and mining firms have so far defaulted on $18 billion in debt, but Fitch contends that the sector will see as much as $70 billion in defaults by the end of this year.

One company that defaults in this sector, SandRidge Energy, also saw a collapse in share price as the company reached bankruptcy. Now a penny stock, SandRidge has lost 99% of its value in the last 5 years, with 93% of that decline happening in just the last two years.

With that decline, over $5 billion in shareholder wealth disappeared.

Other energy defaults are expected to accelerate, but Fitch highlighted coal as the most significant contributor and the weakest subsector overall. Coal defaults are expected to climb to “an astounding” 60% says Fitch, adding that energy exploration and production will rise to between 30% and 35%. Metals and mining will rise to just 20%.

In a similar move, Fitch competitor, Moody’s Investor Service, raised their global default rate expectations to 4.7% by the beginning of 2017. Higher defaults are expected throughout the energy sector, as Moody’s Vice President Sharon Ou noted in a press release. “Of the 18 defaults since the start of the year, half have been in commodity sectors,” Ou noted, and the firm expects several billions in further defaults to come by the end of the year.

Consumer Weakness

Lower energy costs have not driven more activity in the consumer sector.

That is one conclusion from a recent study by Black Box Intelligence, a restaurant industry research firm. The firm said restaurants in the U.S. saw a 1.3% decline in February on a year-over-year basis, while average money spent per customer in restaurants grew at its lowest pace in nearly two years. Whether that is due to lower purchasing power among Americans or just a stubborn refusal to spend more, restaurants are seeing less sales growth and weakening traffic.

According to Black Box’s Executive Director, “severe winter weather” combined with a February date in the Super Bowl were contributing factors. Black Box also noted, however, that the biggest decline in sales (2.6%) and traffic (4.3%) were in Florida, where severe weather was not an issue. At the same time, New England bucked the cold weather and saw restaurant sales rise 5.4% and traffic rise 3.9% on a year-over-year basis.