Strategists are warning that corporate defaults will only continue to skyrocket as the Federal Reserve prepares to hike rates and oil and commodity prices remain stalled, the Financial Times reported.
“The amount of debt owed by U.S. companies relative to the size of their profits has been increasing, according to Alberto Gallo, macro credit strategist for RBS, with the proportion of the most indebted borrowers rising since mid- 2014,” the FT reported.
“This tail of highly levered borrowers is likely to be vulnerable to rising rates,” he said in a note to clients.
Corporate defaults occur when a borrower misses the payment on a bond, exchanges distressed debt for new notes, or files for bankruptcy protection. The number of borrowers to default in 2015 passed the century mark last week, according to S&P, the FT reported.
Meanwhile, Moody's said its trailing 12-month global speculative-grade default rate finished at 2.7% in October, up from 2.6% in September. The latest reading came in slightly above the rating agency's year-ago prediction of 2.4%.
"The energy sector remains the most troubled, accounting for almost a quarter of the 79 defaults so far this year," said Sharon Ou, Vice President and Senior Credit Officer of Moody's Credit Policy Research.
"The credit market has seen some volatility recently, reflecting investors' concerns about the impact of a potential Fed interest rate hike on the global economy in addition to ongoing commodity price deflation," added Ou.