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Thu May 5, 2016, 11:43 AM

It’s happening — oil and gas defaults are starting to hurt the rest of the credit market

(MarketWatch) The high default rate in the oil and gas sector after a long period of low oil prices is starting to hurt the broader high-yield market, according to a new report from Moody’s.

Until now, slow-but-positive U.S. growth has been a support for corporate cash flow and helped prevent commodity weakness from spreading to other sectors.

“But the commodity-driven climb in defaults is contributing to an increase in investor risk aversion and borrowing costs,” said analysts led by Moody’s Senior Vice President John Puchalla.

It’s a classic Catch 22 situation. Defaults are making investors nervous and that is making it more expensive for speculative-grade, or high-yield, companies to borrow short term to resolve liquidity issues. That’s because investors demand higher premiums for the extra risk they are taking on. And that in turn presents risks to the economy and makes if more likely the default risk will spread. ...........................(more)


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