According to Moody’s Investor Services, there is an expected decline in global debt defaults this year, although troubling trends are emerging in the hotel, gambling and leisure sectors.
The latest research conducted by Moody’s Investor Services estimates a global default rate of 2,2 per cent for investment-grade and high-yield corporate bonds. Although this figure is down from last year’s 3,1 per cent, it is still above a long-term average of 1,7 per cent. Moody’s estimates that a 2,2 per cent projection will result in 137 defaults this year alone.
The affected industries are the ones showing high levels of coronavirus-related instability. When looking at 2020 figures, sectors such as oil and gas had a default rate of 24,6 per cent. Additionally, retail (1,4 per cent) and business services (12,8 per cent) were also hit hard by the pandemic last year. However, it is the hotel, leisure and gambling industries that are expected to take a knock in 2021.
“By sector, we expect Business Services and Hotels, Gaming and Leisure to have the most defaults in 2021, followed by Oil & Gas. Measured by default rates, Hotels, Gaming and Leisure will be the most troubled sector”, says the rating agency.
Not All is Doom and Gloom for Gambling
The combined hotel, leisure and gambling sectors form an expansive industry. It’s fair to say that most operators within these market segments are currently experiencing some form of weakness in light of the COVID-19 pandemic. Nonetheless, seldom will two debt issues be the same.
It currently makes sense for equity and credit investors to consider the gambling sector for several reasons. Firstly, during the pandemic, casino operators have been able to raise cash more easily, either through new bond issues or equity sales. Secondly, some observers are being bullish regarding the debt offered by gaming operators.
Moody’s previously indicated that, within the broader leisure landscape, casinos and restaurants are likely to rebound more quickly this year than hotels and cruise liners.
“In terms of gaming and restaurants, they have probably weathered the worst of the pandemic,” says Moody’s. “Nevertheless, they still face risks, such as possible additional closures and more restrictive capacity constraints.”.
No Name-Calling
In its most recent report this year, Moody’s didn’t go as far as identifying specific gambling industry names that could be seen as problematic for bondholders. Still, in one of its previous researches, the rating agency did point fingers at Melco Resorts & Entertainment (NASDAQ: MLCO) and its spiralling debt levels.
According to reports, Caesars Entertainment (NASDAQ: CZR) is one of the most indebted US-based casino operators, with obligations totalling a hefty US$16,2 billion as of 30 September 2020. However, Caesars wasn’t directly mentioned by Moody’s, since the company has been able to access capital markets and raise the necessary cash via the sale of assets when needed.
Moody’s has been tracking the default rate for the leisure industry since 1979. According to records, over the last 41 years, the default rate for this market segment reached double-digit percentages on only four occasions – during the recessionary 1989 and 1990 periods, as well as in 2008 and 2009, during the global financial crisis.
