$1 Trillion In Distressed Credit Is Weighing On The Global Economy

UBS recently issued a global credit report, highlighting the $1 trillion in distressed credit of which a significant percentage are bonds from commodity-related industries. Matthew Mish and Stephen Caprio, analysts at UBS, gave their opinion on this critical topic for the global economy. "...commodity-related exposure is the largest single factor driving distress – but it is a minority share that, in aggregate, represents about 25% of all distressed exposure... The forward outlook will depend heavily on commodity prices; however, even if prices stabilize and incrementally move higher (in line with the strip) we expect significant default realizations ahead." Analysts at UBS gave 2 key takeaways regarding their concern for the global distressed credit: 1. Commodity defaults UBS noted that credit spreads are leading commodity defaults as oil producers are being hurt by a combination of oversupply and depressed commodity prices. UBS is concerned regarding the effects of multiple companies' risk appetite as producers and exploration companies continue to default and the need for liquidity increases for additional investments. 2. Negative cash flow UBS wrote that they believe the trigger for a refinancing crunch will be caused by negative cash flow stemming from depressed profits. UBS forecasts that profit declines for major indices may continue to decline and the rising costs of funding reaches levels that put pressure on multiple corporations.