More firms to default on debt due to business slowdown

More companies could default on their borrowings before the end of the year as business activities remain well below pre-pandemic levels, Moody’s has forecast.

The credit rating agency expressed concern that while economies around the world are beginning to recover after the global lockdown, struggling businesses would still end up defaulting on their debt.

By year’s end, global default rate could increase to 7.8 percent, more than double the pre-pandemic level of 3.2 percent. By March 2021, the rate will peak at 8.4 percent before dropping back to 6.8 percent by September 2021.

“The number of monthly defaults will likely rise somewhat over the next 12 months as business activities still remain well below pre-pandemic levels,” Moody’s said in a report featured in its Credit Outlook publication that was released on Thursday.

“The uneven economic recovery will likely be insufficient to save many of the weakest companies from default, especially those in the hardest hit sectors or those that were already struggling before the coronavirus,” it added.

Oil and gas

Companies in the oil and gas sector have dominated corporate defaults this year, accounting for 41 cases from January to September. Among the latest defaulters were FTS International Inc., Oasis Petroleum, Petroleum Geo-Services ASA and Transocean, all were either in the exploration and production or oilfield services fields.

In the coming year, however, Moody’s said those that will struggle to repay their debt will be companies in the business services sector. Companies in the hotel, gaming, leisure, oil and gas industries will account for the second-largest number of defaults.

Year-to-date defaults

From January to September, Moody’s recorded 166 corporate defaults globally, two of them were reported in the Middle East and Africa.

Among the regions monitored, North America topped the list of defaults, with the United States accounting for 112 cases.  In the Asia-Pacific region, 12 corporate defaults were recorded during the nine-month period.

“Our forecast of rising default rates through March 2021 is underpinned by the increased share of lower-rated companies in recent years and the downward rating momentum earlier this year following the pandemic-induced economic turmoil,” Moody’s said.

Central banks around the world, including the UAE, have intervened and rolled out stimulus packages to mitigate the impact. However, Moody’s said the monetary aid wouldn’t be able to save some companies from defaults.

“Although central banks have provided unprecedented liquidity support to capital markets, these measures will not prevent insolvent companies from defaulting,” the credit rating agency said.



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