Are Default Rates Likely to Rise Globally?

Moody’s Investors Service expects global default rate to rise to 10.6% by end-2020 and increase further to 11.3% by end March 2021. The default rate in March 2020 was 3.5%.

With Covid-19, lockdowns are common in all major economies. Attendant effect is an induced recession which may only see its end by late 4^th quarter of 2020. In addition, oil prices have plummeted because of the Saudi-Russian production disagreement and market weakness owing to the impending global contraction of demand. Financial markets have also crashed due to the pandemic, unemployment, earnings destruction and bankruptcies.

Default rates are anticipated to be highest in the hotel, gaming, leisure, aviation and oil and gas sectors. The table below is for the U.S.

Source: Moody’s Investors Services

Companies that have low ratings and/or are highly leveraged are the most vulnerable. The speculative grade bonds are anticipated to have default rates of 7.7% to 18.4%.

In more recent weeks stock markets have plunged amid panic selling by investors. They have become more risk averse.

Mohamed El-Erian, chief economic adviser at Allianz SE, views companies with vulnerable balance sheets – little cash but high maturing debt – are going to find it difficult to refinance, giving rise to higher credit defaults. Businesses in tourism, airlines, hotels and cruise lines are unable to generate income and are most vulnerable.

It is anticipated that almost USD840 billion of triple B bonds are due this year and about USD270 billion of them trade below 90 cents to the dollar. Many companies are already locked out of refinancing or securing new debt.

Going forward, a lot depends on duration of the crisis. Support will be required from central banks and governments to stem the downward spiral. Malaysia has tested ability in putting in place mechanisms for defaults of this nature. Danajamin could play a significant role in enhancing credit support for those companies fundamentally strong but cash flow deficient. Danaharta 2.0 is a good step forward to acquire those NPLs that need more time to be nursed back or divested in a rising market. The CDRC under the auspices of Bank Negara may need reactivation for large companies to work-out their issues. In sum, Malaysia will be able to withstand the headwinds in this crisis, if professionals and technocrats are engaged.

Reference:

1.     Moody’s Default rates to rise due to recessions in economies, Focus Malaysia, 13 April 2020

2.     Mayra Rodriguez Valladares, Covid-19, Economic Crisis Will Bring a Tidal Wave of Company Defaults in 2020 and 2021, Forbes, 4 April 2020

3.     Simmons+Simmons, Covid-19 Impact on the global economy and increase in debt defaults, 31 March 2020