S&P global junk default rate hits 7.29% in May; weakest links down

By Caroline Salls

Pittsburgh, June 17 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 7.29% in May from 6.19% in April, according to S&P's latest "Global Bond Markets' Weakest Links and Monthly Default Rates" report.

By region, the U.S. speculative-grade default rate increased for the 18th consecutive month, with the U.S. rate increasing to 8.13% for the 12 months ended in May from 6.75% in April. Meanwhile, the rate increased to 5.1% from 4.62% in Europe and was up to 5.77% in the emerging markets from 4.89% in April.

The agency said it expects the U.S. corporate speculative-grade default rate to continue rising to an all-time high of 14.30% by May 2010.

According to the report, S&P expects the economy to bottom out in the third quarter of 2009 but defaults are to likely remain abundant past that time.

S&P said its baseline projection of 14.30% would result in an unprecedented trough-to-peak increase of more than 13%, outstripping the rate of increase observed in any previous default rate cycle since the start of its series in 1981.

The current record for the U.S. corporate speculative-grade default rate is 12.54%, recorded in July 1991, S&P reported.

To realize the baseline projection of 14.30%, S&P said 203 issuers must default in the next 12 months, for an average of 16.9 defaults per month and 50.7 defaults per quarter.

New defaults rising

Through June 11, 152 defaults were recorded, affecting debt worth $387.31 billion. In comparison, S&P said 126 defaults were recorded in all of 2008, affecting debt worth $433 billion.

The new defaulters since S&P's most recent report included R.H. Donnelley Inc., Rapsod Trade Ltd., Atrium Cos. Inc., Mandra Forestry Finance Ltd., Inn of the Mountain Gods Resort and Casino, Neo-China Group (Holdings) Ltd., Lazy Days R.V. Center Inc., Caraustar Industries Inc., Barzel Industries Inc., Majestic Holdco LLC, ION Media Networks Inc., Dana Holding Corp., Georgia Gulf Corp., Berry Plastics Group Inc., Metaldyne Corp., Visteon Corp., General Motors Corp., Imcopa Importacao, Exportacao e Industria de Oleos SA, Lear Corp., Saad Group, Newport Television LLC, Hawker Beechcraft Inc., Travelport Holdings Ltd., Kinetek Holdings Corp., Fontainebleau Las Vegas Holdings LLC and Crescent Resources LLC.

Alternative scenarios

Under two alternative economic scenarios, the pessimistic default scenario yields a "catastrophic" mean default rate of 18.50%. Meanwhile, the optimistic scenario yields an average default rate of 11.50%.

In the next 12 months, 262 defaults are required to reach the pessimistic default rate forecast and 163 defaults to reach the optimistic forecast.

Weakest links

As of June 11, 290 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 $369.95 billion.

S&P said the decrease from 293 weakest links in April and a record 300 in March was largely attributable to the sharp rise in defaults, many of which were weakest links. The ratings agency said this is a trend that will likely continue for some time.

The current count of weakest links is three less than the number reported last month.

S&P added that 124 of the 135 publicly rated companies that have defaulted so far in 2009 were weakest links.

Since the last report, 33 issuers were removed from the weakest links list and 30 were added.

Of the 33 issuers removed from the list, 20 defaulted, six were removed because S&P withdrew their ratings, five were removed because of a change in their CreditWatch/outlook status and two were removed because they were replaced by their parent companies.

Of the 30 new weakest links, 16 issuers were added because they were downgraded, six because of a revision of their outlook/CreditWatch status together with a downgrade, five because of a revision of their outlook/CreditWatch status to negative and three are newly rated.

Of the new additions to this month's list, 22 were from the United States, five were from emerging markets and three were from Europe.

The forest products & building materials and utility sectors had the biggest increase in weakest links, with four issuers each.

Sector breakdown

S&P said the media and entertainment sector showed the greatest vulnerability to defaults, with 55 weakest links, constituting 19% of the total, followed by forest products and building materials and retail and restaurants with 24 weakest links each.

The agency said issuers 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 72.1%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 209 U.S.-based weakest links account for $296.5 billion of debt, or almost 80.15% of the total $369.95 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 increased to a 78-month high of 5.83% in May from 5.39% in April.

The loan distress ratio decreased to 47.47% in May from 54.7% in April.

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