UBS Increases Energy-Bond Default Rate Outlook to as High as 25%

(Bloomberg) — One out of four high-yield bonds in the U.S. energy sector may default this year if depressed oil prices coincide with a credit-market downturn, UBS AG credit research analysts predicted Wednesday.

The analysts revised their projection to a default rate of 15 percent over the next 12 months as they reduced their oil price expectations, and they said it might reach 25 percent if combined with a credit downturn, according to a report published Wednesday. The bank had forecast a 10 percent default in the sector earlier this month.

“The current oil collapse has been driven by higher-than- expected supply and weaker demand,” as opposed to weaker demand alone as was the case in other recent declines, Matthew Mish, a strategist at UBS, said in the report.

“This suggests the current selloff could take longer than prior occasions and the subsequent recovery could be more muted,” said Mish. UBS this week cut its West Texas intermediate oil forecast to $49 from $64.75 for 2015 and to $62.50 from $75 for 2016. U.S. crude traded at $45.23 at 11:30 a.m. in New York.

Oil has declined 58 percent since June as the U.S. produced at the fastest pace in more than 30 years in 2014 while the Organization of Petroleum Exporting Countries resisted calls to cut supply.

To contact the reporter on this story: Jodi Xu Klein in New York at [e-mail] To contact the editors responsible for this story: Shannon D. Harrington at [e-mail] Mitchell Martin, Richard Bravo