S&P November global junk default rate sets new 25-year low at 0.74%

By Caroline Salls

Pittsburgh, Dec. 13 - Standard & Poor's 12-month trailing global corporate speculative-grade bond default rate fell further in November, dropping to 0.74% in November from 0.79% in October.

The November rate is a new 25-year low.

S&P said the global default rate has been below its long-term 1981 to 2006 average of 4.48% for 46 straight months.

By region, the speculative-grade default rates were recorded at 0.97% in the United States, inching down from 0.98% in October; 0.94% in Europe, down from 1.42% in October; and holding steady at zero in the emerging markets.

The agency said it now expects the U.S. default rate to close out 2007 at close to 1%, which would be the lowest year-end rate recorded in 25 years.

S&P said default occurrences remain scarce, even though access to credit has become more challenging following the mortgage market turbulence that began in the summer.

According to the report, financial strategies implemented during the favorable credit environment of recent years have insulated even the most vulnerable entities, allowing them to continue meeting financial obligations and forestall payment default despite the more challenging credit landscape.

However, S&P said it still expects the default rate trajectory to escalate in the next several quarters based on the cumulative impact of the changes in the credit-pricing environment, an increase in refunding needs and a slowing economy.

One default was recorded among global corporates rated by S&P in November, bringing the total to 18 defaults so far for 2007 on rated debt worth $6.5 billion.

The November default was American Color Graphics Inc.

In the United States, S&P reported the forest and building products and homebuilders sector had the highest default rate by industry in the trailing 12 months at 2.50%, followed by the aerospace, automotive, capital goods and metal sector, which recorded a default rate of 1.56% in November, whereas the default rate in the leisure time/media sector was 0.78%.

In the leveraged-loan segment, S&P reported the lagging 12-month default rate hit a record low of 0.26% at the end of November from 0.40% a month earlier.

The agency said it believes that corporate defaults "will materialize in a more meaningful way in the second half of 2008 and likely continue into 2009."

As a result, S&P said its forecast is for a 12-month forward speculative-grade default rate of 3.40% in the Unites States, much higher than current levels but still lower than the 4.50% historical average.

Weakest links

As of Nov. 30, S&P reported 101 weakest links globally were vulnerable to default on $57.7 billion of combined rated debt.

This latest weakest links count is one more than in October.

Weakest links are defined as issuers rated B- or lower with either a negative outlook or ratings on CreditWatch with negative implications.

With 18 issuers, S&P said the consumer products sector continued to show the highest vulnerability to default among the weakest links, constituting 18% of the list, followed by the retail/restaurants sector at 16% and the media and entertainment sector with 11% of the total weakest-links issuers.

One sovereign, the Republic of Lebanon, is on the list.

Geographically, U.S.-based issuers accounted for 76% of the total, which S&P said can be attributed to the higher ratings penetration in the U.S. marketplace.

Elsewhere, Canada accounted for 8% of the list, and Europe accounted for 6% of the total issuers.

Since the last report, S&P said eight issuers were removed from the weakest-links list and nine were added. Of the eight issuers removed from the list, six were because of a revision in outlook/CreditWatch status, one was no longer rated and one defaulted.

Of the nine new entrants this month, three were added because of a change in their outlook/CreditWatch status and six were downgraded to B- from B.

High-yield issuance

S&P said that new high-yield issuance remained challenged in November as issuers faced less-accommodating financing provisions and a market hesitant to absorb low-grade issuance, resulting in 17 new issues totaling $9.15 billion billion.

S&P said issuance rated CCC+ or lower as a share of total speculative-grade issuance also remains elevated since its sharp run-up in 2004, as the share of new issues rated CCC+ and lower as a proportion of total speculative-grade issuance in the trailing six months increased to 28.2% in November from 23.2% in October.

According to S&P, the industrial sector continues to be the leader in issuing low-rated debt through November, with deals worth $38.8 billion, following the trend established in 2006.

Within industrials, the retail/restaurants, health care and high technology sectors took the lead, with each sector issuing more than $5 billion in low-grade issuance in the year to date.

At Dec. 11, S&P said spreads stood at 548 basis points, compared with 540 bps at the end of the November and 429 bps at the end of October. As the default rate gradually increases to 3.40% in the next 12 months, with market volatility remaining high at about 25 bps to 30 bps, S&P said speculative-grade spreads could exceed 600 bps.

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