S&P global junk default rate climbs to 8.25% in June on 179 defaults

By Caroline Salls

Pittsburgh, July 27 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 8.25% in June from 7.29% in May, 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 19th consecutive month, with the U.S. rate increasing to 9.25% for the 12 months ended in June from 8.14% in May.

Meanwhile, the rate increased slightly to 5.1% from 5.08% in Europe and was up to 6.49% in the emerging markets from 5.8% in May.

The agency said it expects the U.S. corporate speculative-grade default rate to fall slightly to 13.9% by June 2010 from its peak in the quarter before that.

According to the report, this represents a slight moderation from S&P's previously baseline projection of 14.3% in March 2010.

S&P said these projections represent a near 13% increase from the trough of the default rate in December 2007, the highest rate of increase observed in any prior default rate cycle since the start of the series in 1981.

The ratings agency said the considerable volume of defaults that have materialized, which it expects to continue, should partially alleviate the default pipeline by the middle of 2010.

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 13.9%, S&P said 197 issuers must default in the next 12 months, for an average of 16.4 defaults per month and 49.2 defaults per quarter.

New defaults rising

Through July 17, 179 defaults were recorded, affecting debt worth $424.44 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 Extended Stay Hotels, Momentive Performance Materials Inc., William Lyon Homes, Building Materials Holding Corp., Cooper-Standard Automotive Inc., Sabre Holdings Corp., Finlay Jewelry Corp., Hovnanian Enterprises Inc., Eddie Bauer Holdings Inc., Metromedia International Group Inc., Kazanorgsintez OJSC, Fraser Papers Inc., Affinity Group Holding Inc., Red Roof Inns Inc., Grant Forest Products Inc., the McClatchy Co., Allis-Chalmers Energy Inc., Bombardier Recreational Products Inc., Express Energy Services Operating LP, Safilo SpA, CCS Medical Inc., NXP BV, Euramax International Inc., RathGibson Inc. and Travelport LLC.

Alternative scenarios

Under two alternative economic scenarios, the pessimistic default scenario yields a "catastrophic" mean default rate of 18%. Meanwhile, the optimistic scenario yields an average default rate of 11.40%.

In the next 12 months, 255 defaults are required to reach the pessimistic default rate forecast and 161 defaults to reach the optimistic forecast.

Weakest links

As of July 17, 285 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 $397.8 billion.

S&P said the decrease from 290 weakest links in June 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 five less than the number reported last month.

S&P added that 146 of the 161 publicly rated companies that have defaulted so far in 2009 were weakest links.

Since the last report, 32 issuers were removed from the weakest links list and 27 were added.

Of the 32 issuers removed from the list, 10 defaulted, 10 were removed because S&P withdrew their ratings, and 12 were removed because of a change in their CreditWatch/outlook status.

Of the 27 new weakest links, 16 issuers were added because they were downgraded, five because of a revision of their outlook/ CreditWatch status together with a downgrade, four because of a revision of their outlook/CreditWatch status to negative, and two are newly rated.

Of the new additions to this month's list, 14 were from the United States, six were from emerging markets, four were from Europe, and three were from Canada.

The media and entertainment, transportation, capital goods, chemicals, packaging, and environmental services and consumer products sectors had the biggest increases in weakest links, with three entities each.

Sector breakdown

S&P said the media and entertainment sector showed the greatest vulnerability to defaults, with 50 weakest links, constituting 18% of the total, followed by forest products and building materials and retail and restaurants with 24 and 21 weakest links, respectively.

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 69.5%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 198 U.S.-based weakest links account for $322.66 billion of debt, or almost 81.11% of the total $397.8 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 79-month high of 6.21% in June from 5.83% in May.

The loan distress ratio decreased to 42.91% in June from 47.47% in May.

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