S&P April global junk default rate jumps to 1.29%; weakest links hit five-year high of 130

By Caroline Salls

Pittsburgh, May 16 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate hit a 12-month high of 1.29% in April, up from the 1.14% default rate reported in March, according to S&P's latest "Global Bond Markets' Weakest Links and Monthly Default Rates" report.

Despite its jump since March, S&P said the default rate has stayed below its long-term 1981 to 2007 average of 4.35% for 51 consecutive months.

By region, the speculative-grade default rate for the 12 months ended in April was 1.64% in the United States, up from 1.40% in March; 0.50% in Europe, a slight increase over the 0.49% March rate; and 0.17% in the emerging markets, the same as in March.

The ratings agency said its mean baseline forecast predicts that the U.S. speculative-grade default rate will escalate to 4.7% in the next 12 months, from a 25-year low of 0.97% recorded at the end of 2007.

Through May 13, 28 defaults were recorded, affecting debt worth $18.9 billion.

S&P said this default count already exceeds the 22 defaults recorded in all of 2007 and is just two shy of the 30 defaults in 2006.

Of the 28 defaults, 27 were from the United States and one from Canada.

S&P said nine companies defaulted in April, including two confidentially rated entities, and another two defaulted through May 13, all from the United States.

These latest defaulters included Kimball Hill Inc., Home Interiors & Gifts Inc., French Lick Resorts & Casino LLC, Recycled Paper Greetings and Tropicana Entertainment LLC.

S&P said the increase in defaults reflects the unfolding recessionary conditions, weaker earnings prospects and continued financial pressures that will increase lending constraints.

According to Friday's report, continued financial market volatility, tightening credit conditions, an unfolding housing correction, dollar weakness and the risk of a larger or a smaller impact of the fiscal stimulus package contribute to substantial variability in the default forecast.

S&P warned that there is still a definite risk that defaults could be significantly more pronounced and severe, especially if the recession would be deeper and longer than expected.

The agency said its pessimistic scenario yields a mean 12-month default rate of 8.5%, nearly double the long-term average of 4.4%, but still below the peak in 2001-2002, and the optimistic scenario yields an average default rate of 3.7%, below the long-term average.

In the next 12 months, 136 defaults are required to reach the pessimistic default rate forecast of 8.5% and 59 defaults to reach the optimistic forecast of 3.7%.

Weakest links

As of May 13, 130 weakest links, defined as issuers rated B- or lower with either a negative outlook or with ratings on CreditWatch negative, were vulnerable to default on rated debt worth $127.4 billion.

The current count of weakest links is the highest in five years, S&P reported, and eight more than the number reported last month.

S&P said the increase in weakest links is not surprising given the elevated volatility in the credit markets and the unfolding recessionary conditions in the United States. S&P said 19 of the 28 issuers that have defaulted so far this year were weakest links.

Since the last report, six issuers were removed from the weakest links list and 14 were added.

Of the six issuers removed from the list, three were eliminated because of a revision in their outlook/CreditWatch status, and the remaining three defaulted.

Of the 14 new weakest links, 10 issuers were added because they were downgraded, and four were added because their outlook/CreditWatch status was revised to negative.

All but two additions to this month's list were from the United States, and the consumer product sector had the biggest increase in weakest links with three, followed by finance companies with two.

By sector, S&P said media and entertainment, consumer products and retail/restaurants continue to show the most vulnerability with the highest concentration of weakest links for the 11th consecutive month. Of the 28 defaults in 2008, S&P said half were from these three sectors.

Specifically, S&P said the media and entertainment sector showed the highest vulnerability to default with 24 weakest links, constituting 18.5% of the list, followed by the consumer products sector with 16 weakest links.

In the United States, S&P said modest increases in the default rate in certain sectors are beginning to surface. In April, the leisure time/media and consumer/service sectors each had three defaults.

As the economy continues to deteriorate, S&P said it expects to see more defaults in these sectors and in other consumer-dependent sectors, including retail/restaurants sector.

In the leveraged-loan segment, S&P reported that the 12-month trailing institutional loan default rate reached to a 25-month high of 1.95% in April, from 1.83% in March and 0.44% a year-ago. The loan distress ratio also remains elevated at 15.63% in April, compared to 16.19% in March.

Low-grade debt deals down

Also, S&P reported that the market remains hesitant to absorb low-grade debt, resulting in a significant slowdown in the U.S. issuance pipeline.

A total of 12 speculative-grade deals totaling $3.65 billion came to market in April, better than the average of five deals per month in the first quarter of 2008, but still significantly lower than the average of 38 deals per month in the first half 2007.

According to S&P, the few low-rated issuances in 2008 have been somewhat concentrated in the industrial sector, as the media and entertainment sector tops the list with $1.08 billion of new bonds, followed by the integrated oil and gas sector with $200 million, and the high technology sector with $100 million in the year to date.

In the trailing six months, the share of new issues rated B- and lower as a proportion of total speculative-grade issuance decreased to 30.77% in April from 44.78% in March.

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