In its year-end assessment of opportunities and risks, alternative asset manager Permal Group predicted that high-yield bond defaults will accelerate in 2016 – particularly in the US energy sector.
“This will create new investment opportunities in the distressed credit sector – both on the long and the short sides,” said Permal.
“By several key measures, the credit markets are already more stressed than at the end of 2011 when the stage was being set for a very profitable couple of years.
“Many of the commodity hedges that have protected US exploration and production companies to date are expiring in 2016, commercial banks are adjusting credit lines to the energy sector, and capital markets are tightening.
“With oil below US$50 a barrel and natural gas at US$3/MMBtu, our analysis leads us to believe that default rates could be as high as 30 per cent by 2017 in a sector that is estimated to be US$250 billion,” said Permal.
Defaults could even extend to the US mining sector and could even be seen beyond the commodity complex, said Permal, advising investors to “keep [their] powder dry”.
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