S&P global junk default rate climbs to 3.83% in January

By Caroline Salls

Pittsburgh, Feb. 20 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 3.83% in January from 3.47% in December, according to S&P's latest "Global Bond Markets' Weakest Links and Monthly Default Rates" report.

S&P said the default is closing in on its long-term 1981-to-2008 average of 4.25%.

By region, the U.S. speculative-grade default rate for the 12 months ended in January increased to 4.66% from 4.09% in December, marking the 14th straight month the U.S. rate increased. Meanwhile, the rate held steady at 2.54% in Europe, but was up marginally to 1.97% in the emerging markets from 1.96% in December.

The agency said its mean baseline forecast predicts that the U.S. speculative-grade default rate will escalate to 13.9% in the next 12 months, through January 2010 from a 25-year low of 0.97% recorded at the end of 2007.

To reach the baseline forecast of 13.9%, S&P said 206 issuers must default in the next 12 months, for an average of 17.2 defaults per month and 51.6 defaults per quarter, more than double the corresponding 2008 pace of 7.8 and 23.5, respectively.

Defaults up again

Through Feb. 16, 31 defaults were recorded, affecting debt worth $49 billion. S&P said this is one-quarter the amount of defaults recorded in 2008, when 126 companies defaulted, affecting debt worth $432 billion. The rise in defaults in 2008 is in sharp contrast with trends in previous years, when only 22 defaults were recorded in all of 2007 and 30 in 2006.

The new defaulters since S&P's most recent report included Foamex LP, Neo-China Group (Holdings) Ltd., Smurfit-Stone Container Corp., Bonten Media Group Inc., Scottish Annuity & Life Insurance Co. (Cayman) Ltd., Vitro SAB de CV, ASAT Holdings Ltd., Morris Publishing Group LLC, Indalex Holding Corp., Spectrum Brands Inc., Station Casinos Inc., Akerys Holdings SA, Pliant Corp., Muzak Holdings LLC, Aleris International Inc. and Castle Holdco 4.

Under two alternative economic scenarios, the pessimistic default scenario yields a "catastrophic" mean default rate of 18.5%. Meanwhile, the optimistic scenario yields an average default rate of 10%.

In the next 12 months, 274 defaults are required to reach the pessimistic default rate forecast and 148 defaults to reach the optimistic forecast.

Weakest links

As of Feb. 16, 265 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 $485.74 billion, marking the 12th straight month that the agency has reported an increase in weakest links.

The current count of weakest links is 19 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 recessionary conditions in the United States. S&P added that 97 of the 105 publicly rated issuers that defaulted in 2008 were weakest links.

Since the last report, 20 issuers were removed from the weakest links list and 39 were added.

Of the 20 issuers removed from the list, 11 defaulted, four were no longer rated, three were removed and replaced by their parent company and two were eliminated because of a change in their CreditWatch/outlook status.

Of the 39 new weakest links, 20 issuers were added because they were downgraded, 11 because of a revision of their outlook/CreditWatch status to negative, six were downgraded because of a revision of their outlook/CreditWatch status together with a downgrade and two were new ratings.

Of the new additions to this month's list, 30 were from the United States, five were from emerging markets, three were from Europe, and one was from Canada. The oil and gas exploration and production sector had the biggest increases in weakest links with seven.

Sector breakdown

S&P said the media and entertainment sector showed the greatest vulnerability to defaults, with 54 weakest links, constituting 20% of the total, followed by forest products and building materials with 25 weakest links, retail and restaurants with 20 and consumer products with 19.

The ratings agency said entities in these sectors are particularly vulnerable to cyclical downtrends in the macroeconomic environment.

Geographically, S&P said U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 77.4%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 205 U.S.-based weakest links account for $429 billion of debt, or almost 88% of the total $485 billion of debt issued by all weakest links.

Leveraged loans

In the leveraged-loan segment, S&P reported that the 12-month trailing institutional loan default rate fell to 4.18% in January from a 57-month high of 4.35% recorded in December.

The loan distress ratio also decreased to 69.9% in January from 79.8% in December.

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