Recent Default Rates Influenced by Two Sectors

We’ve seen a rise in default rates across asset classes, whether you’re talking about P2P lending, stocks, or bonds. The bulk of it is attributed to the Energy and Materials sectors. Specifically, oil prices have undergone a massive fall in pricing due to a supply issue, which led many energy projects to halt / cancel exploration and drilling projects and consequently laid off many employees. From Lending Alpha’s point of view, the loans we invest into are materially affected by a borrower’s main source of income: their jobs.

That is why our loan selections models since late 2015 have been enhanced avoid lending to borrowers from zip codes that are heavily exposed to the Energy and Materials sectors. We have performed the necessary research to identify these geographic locations and applied exclusion filters across the board in order to avoid impacted borrowers who may have lost their jobs or are at risk of losing their jobs soon. Effectively, this is one of among many  of the risk management strategies we employ in our models, and are transparent and seamless to our investor clients. We actively improve everyone’s returns using proprietary techniques not available anywhere else, in addition to traditional methods.

Here’s a look at some macro-economic data. We reference the HY (high yield corporate bonds) indices to represent the health of corporations by sectors (those who employ the potential borrowers in Lending Club’s platform).

It’s clear that the Energy sector is attributed to a disproportionate amount of the recent defaults within the HY index.

HY Default Rates by Sector

When these two sectors are combined and compared against all other sectors from a global perspective. It’s clear see where the recent market risks in terms of default rates.

HY Defaults Mostly Attributed to Energy and Materials

The number of jobs for Oil & Gas extraction industry peaked in 2014 and began declining in 2015.

Jobs loss - Oil & Gas

The number of jobs for the Coal mining industry peaked in 2012 and started to decline in 2014.

Jobs loss - Materials

 

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