S&P: 5.4% of defaults in 1981 to 2009 recorded by repeat defaulters

By Caroline Salls

Pittsburgh, Nov. 10 - Standard & Poor's identified 99 issuers as "repeat defaulters" in the period of 1981 to 2009, representing about 5.4% of the total pool of defaulted issuers in this period, according to a report titled "Til Debt Do Us Part: A Study of Serial Defaulters."

S&P said that examining the characteristics of companies that have defaulted more than once can help to form the expectations for the hundreds of companies that defaulted in 2008 and 2009.

The agency said that so far in 2010, the number of recorded defaults has declined substantially, largely because issuers have extended their maturities or negotiated with lenders for more financial headroom against their covenants.

Nevertheless, S&P said it remains cautious about latent longer-term risks, particularly for the surviving low-rated issuers that have benefited from a temporary reprieve but that could find themselves facing challenges again in a few years.

Of the 99 repeat defaulters the agency found in its study, 90 defaulted twice and nine recorded three defaults.

S&P said aggressive financial policies that resulted in overleveraging, typically as a result of multiple acquisitions, were a frequent feature of the serial defaulters.

"So it is no surprise that the leveraged buyout (LBO) craze in the 1980s and, more recently, in the past five years negatively affected several serial defaulters," S&P said in the report.

By industry, S&P said it observed a preponderance of nonfinancial companies on the list of serial defaulters, typically in the consumer discretionary, materials and industrial segments.

S&P said other factors, like size and geographical footprint, seemed to have little to no affect on whether a company defaulted more than once.

In addition, S&P said it found that defaults recorded by repeat defaulters "tended to be bunched together in time." Slightly more than two-fifths of all repeat defaulters recorded their first and second defaults within less than two years.

Distressed exchanges prevalent

The agency said issuers that implemented distressed exchanges were notably susceptible to repeat defaults.

Among the 99 serial defaulters identified, 40 companies implemented distressed exchanges at the first instance of default. Of these, just less than half recorded another default via either a missed payment, another distressed exchange or bankruptcy, less than one year later.

S&P said this shows that although companies may initiate distressed exchanges to manage their financial burdens, these measures do not necessarily prevent companies from facing renewed credit risk in the future.

Despite these findings, S&P said defaulting multiple times does not necessarily signal the end of a company. Nearly one-third of all serial defaulters currently have active ratings.

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