The number of “weakest links” within the global corporate-credit picture is at its lowest in two years, an improvement that’s due to higher crude prices helping oil and gas companies dig out from their debt burden.
With the new total, the consumer products sector has surpassed oil and gas as most vulnerable, but the shift is owed more to a decline in the number of oil and gas weakest links than to a rise in consumer products weakest links, an S&P Global Fixed Income Research group report out Wednesday showed.
The reported showed that 198 companies are considered global weakest links, whose default risk could drive up borrowing costs for the broader credit markets. These companies are sitting on rated debt worth about $225 billion in total. Weakest links are issuers rated ‘B-’ or lower with negative outlooks, or ratings on CreditWatch with negative implications, at S&P. By comparison, the global weakest links count was highest in April 2009, during the financial crisis, when the total hit 300.
“With relatively low — though potentially rising — financing costs, low volatility and strong demand, we anticipate defaults to be comparatively low in 2018,” said Diane Vazza, head of the S&P Global Fixed Income Research group.
The number in the oil and gas sector was elevated in 2016 due to stress in the sector from a prolonged period of unstable commodity prices. This caused credit quality to deteriorate, but this has since subsided, the researchers said. Crude futures
settled above $60 for the first time in more than two years to wrap up 2017 and is above $63 a barrel in early 2018.
On the other hand, the consumer products and retail and restaurants sectors have been facing the negative impact of the structural shifts in consumer spending habits and stiff competition from the well-positioned e-commerce competitors, S&P noted.
The consumer products sector now leads the weakest links tally with 34 issuers as of Dec. 26, 2017. Of the 34, 31 are based in the U.S. The media and entertainment sector follows oil and gas, with 24 issuers considered among the weakest links. Retail is next, with more than 20 names on the list.
The significance of the ranking? Over the long term (1981-2016), an average of 7.51% of all global issuers rated ‘B-’ defaulted within 12 months, S&P said, and the average default rate was much higher for issuers rated lower than ‘B-’. Notably, the increase in issues rated ‘B-’ or lower in 2003-2007 was an early warning of the credit deterioration and default risk in the financial crisis of 2008 and 2009.