Energy (oil and gas) and natural resources constituted 44 percent of non-financial corporate downgrades, excluding sovereign-related, for the first quarter of 2016, according to Fitch Ratings.
Despite oil prices rebounding from January lows, weaker oil continues to prod capex reductions and remains a leading force for weakened investment- and sub-investment-grade credit profiles, Fitch said in a note.
For the first quarter of 2016 non-financial corporate downgrades exceeded upgrades by 2.6 to 1. The downgrade-to-upgrade ratio attributed to changes in companies’ operating/industry profiles was 3.2 to 1. US and Latin America accounted for approximately two-thirds of downgrades for the quarter, Fitch said.
Most of the oil and gas issuer downgrades were prompted by Fitch’s revised oil and gas price deck, reflecting expectations that oil prices will remain lower for longer, the ratings agency said, adding that the impact on investment-grade entities has been more modest than for speculative-grade issuers, which have seen cumulative multi-notch downgrades.
“Typically, investment-grade oil and gas entities have the flexibility to adjust their cost base, capex plans and dividends and to sell assets to survive a cyclical downturn. Speculative-grade entities tend to be smaller, with fewer options to sell attractive assets, and have more impending liquidity requirements. The challenges faced by these speculative-grade issuers and by other commodity issuers (such as coal mining issuers), are reflected in Fitch’s US 2016 bond default rate forecast of 20 percent for energy/metals/mining companies.
Fitch expects a more normal 1.5 percent-2 percent bond default rate for issuers outside of these sectors.