S&P global speculative-grade default rate down to 3.65% in August

By Caroline Salls

Pittsburgh, Sept. 17 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate dropped to 3.65% in August from 4.51% in July, marking the ninth straight month that the rate has declined, according to a report titled "Global Bond Markets' Weakest Links and Monthly Default Rates."

By region, the agency said the U.S. speculative-grade default rate decreased to 4.31% in August from 5.48% in July. The default rate in Europe decreased to 2.7% from 3.76%, while the emerging markets default rate fell to 1.59% from 1.93%.

Through Sept. 14, S&P said that 60 issuers have defaulted, affecting debt worth $70.1 billion. In 2009, 264 issuers defaulted, affecting debt worth $627.7 billion.

Of the 60 defaults in 2010, 42 are from the United States, five are from New Zealand, three are from Canada, two each are from Russia and Argentina and one each is from Australia, Ireland, the Netherlands, Indonesia, Hong Kong, Bahrain and Mexico.

The non-confidential defaults recorded since S&P's most recent report included FGIC Corp., Energy Future Holdings Corp., Affinity Group Holding Inc., Allied Nationwide Finance Ltd., Radio One Inc., South Canterbury Finance Ltd. and Wastequip Inc.

Weakest links declining

In addition, S&P said the number of global weakest links, defined as issuers rated B- or lower with a negative outlook or ratings on CreditWatch negative, continues to decline.

As of Sept. 14, there were 128 weakest links, down from 133 the previous month and 278 a year ago.

S&P said that the 128 weakest links have combined rated debt worth $146.31 billion.

Since S&P's most recent report, nine issuers were removed from the list of weakest links and four were added.

Of the issuers removed from the list, three were the result of a favorable revision to their CreditWatch/outlook status, three defaulted, one was replaced by its parent as a weakest link, one was upgraded and one was downgraded and assigned a stable outlook.

Of the four new weakest links, two were downgraded and two were added after S&P revised their CreditWatch/outlook status.

By volume, S&P said the 90 U.S.-based weakest links account for $125.71 billion of debt, or almost 86% of the total $146.31 billion of debt issued by all weakest links.

According to the report, the United States leads in the number of weakest links, with 70%.

Sector breakdown

S&P said the media and entertainment sector showed the greatest vulnerability to defaults, with 27 weakest links, constituting 21% of the total, while oil and gas exploration and production had 11, banks had nine and finance companies had eight.

S&P's year-end 2010 baseline projection for the U.S. corporate speculative-grade default rate is 2.8%. To realize the baseline projection, a total of 41 speculative-grade issuers must default from July 2010 to June 2011, for an average of 3.4 defaults per month.

Under two alternative economic scenarios, S&P said its pessimistic scenario yields a mean corporate default rate of 4.5%, while the optimistic scenario yields an average corporate default rate of 2.5%.

From July 2010 to June 2011, 65 issuers must default to reach the pessimistic default rate forecast of 4.5%, and 37 issuers must default to reach the optimistic forecast of 2.5%.

Leveraged loans

S&P's 12-month-trailing default rate for U.S. leveraged loans has also continued to decline after reaching an 84-month high of 8.25% in November 2009.

The default rate fell to 4.66% in August from 4.91% in July and 5.73% in June.

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