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Unlikely Sector Leads Corporate Loan Defaults

Unlikely Sector Leads Corporate Loan Defaults
(Valiantsin Korznikau/Dreamstime)

By Tuesday, 08 September 2020 05:26 PM Current | Bio | Archive

The economic effects of the COVID-19 pandemic and recent Fed monetary policy continue to reveal themselves.

The latest "reveal" that's taking center stage is risky corporate leveraged loans, with defaults soaring to their highest levels since 2010 by issuer count, and since 2015 by rate.

A report by S&P Global Intelligence breaks everything down, starting with a summary:

U.S. loan defaults continued to rise in July, surpassing 4% by issuer count for the first time since 2010, after five constituents of the S&P/LSTA Leveraged Loan Index tripped defaults on $7.7 billion of term loans.

Since 2007 defaults have averaged around 20 billion a year except 2009, which saw close to 60 billion in defaults. 2020 is approaching 50 billion, and there are still 4 months left in the year.

"With economic fallout from the coronavirus pandemic playing an increasing role, default volume over the last 12 months, at $46.35 billion, outpaces the same period of 2019 by 233%," according to the same report.

Even more sobering than this astonishing surge, it looks like a critical sector of the economy that shouldn't be defaulting on leveraged loans is the sector that's contributing the most defaults...

Oil and Gas Companies Reveal How Fragile the Situation Is

It appears things wouldn't be "so" bad if oil and gas companies weren't defaulting by more than 30% of their total loan amount. This is heavily contributing to the total rate of U.S. loan defaults.

One could also see how oil and gas leveraged loan defaults could also have played a role in the dramatic Dow crash at the end of 2018, as just like now, oil and gas companies were defaulting at over 25% of their total loan amount.

The S&P Global report notes that some examples of the energy sector carnage include (but are by no means limited to):

  • California Resources, which in July filed for Chapter 11 bankruptcy.
  • Fieldwood Energy defaulted in May upon failing to make payments... just one year after emerging from bankruptcy.
  • Ultra Petroleum Corp. in May filed for bankruptcy after completing a distressed exchange in 2018, having emerged roughly one year earlier from bankruptcy

The report adds, "Many in the energy space have in the past attempted to right-size their capital structure in an effort to ride out what became a historic and sustained low oil price environment."

Again, these aren't just large corporations that sell goods to the public, these are energy companies that are vital to the infrastructure of the nation.

And they are defaulting, filing bankruptcies, or both. Does that appear to you to be a good sign for the health of the U.S. economy?

Preparation Can Meet Opportunity If You Start Now

If you wait until defaults overwhelm the system, by then it will be too late to think about making sure your savings will rise to the challenge.

So, if you haven't done so already, now is the time to examine your risk levels and asset classes, and square them away.

It's also a good time to take advantage of the opportunity to diversify some of your savings into precious metals like gold and silver. They have been known to act as a hedge against economic uncertainty.

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Discover more by clicking here now.

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Unlikely Sector Leads Surge of Corporate Leveraged Loan Defaults
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2020-26-08
Tuesday, 08 September 2020 05:26 PM
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