S&P global default rate up to 1.71% in December; weakest links down

By Caroline Salls

Pittsburgh, Jan. 26 - Standard & Poor's 12-month-trailing global corporate speculative-grade default rate increased to 1.71% in December from 1.66% in November, according to a report titled "Global Weakest Links And Default Rates: Global Default Rate Increased Marginally In December."

Regionally, S&P said the U.S. corporate speculative-grade corporate default rate declined to 1.98% from 2.03%, and the European default rate decreased to 1.59% from 1.62%.

The default rate in the emerging markets was unchanged at 0.58%, S&P reported.

S&P said 53 issuers defaulted in 2011, and seven more have defaulted through Jan. 20. Together, these 60 issuers have affected debt worth $87.7 billion.

Issuers defaulting since S&P's most recent report include Delta Petroleum Corp., Dune Energy, Vertrue LLC, Coach America Holdings Inc., Buffet Inc., Hanley Wood LLC, Yell Group plc and Eastman Kodak Co.

The agency's baseline projection for the U.S. corporate speculative-grade default rate in the 12 months ending in September 2012 is 3.1%.

A total of 48 speculative-grade issuers would need to default to realize the mean baseline projection, for an average of about four defaults per month.

The agency said its pessimistic alternative default rate forecast projects a 5.1% rate, and the optimistic scenario would mean a 1.6% rate.

From October to September 2012, 79 issuers would have to default to reach the pessimistic default rate forecast, and 25 issuers would have to default to reach the optimistic forecast.

Weakest links decrease

The agency said the number of global weakest links increased to 131 as of Jan. 20 from 138 at Dec. 16. The 131 weakest links have combined rated debt worth $197.9 billion.

Weakest links are issuers rated B- or lower with a negative outlook or ratings on CreditWatch negative.

Since its most recent report, S&P removed 16 entities from the list of weakest links and added nine others.

Of those removed from the list,

• Smart & Final Holdings Corp. was removed after S&P assigned it to CreditWatch with a positive outlook;

• Centrais Eletricas Matogrossenses SA, Empresa Generadora de Electricidad Itabo, SA, Hercules Offshore Inc., HMSC Corp. and Companhia de Energia Eletrica do Estado do Tocantins were removed after the agency updated the outlooks to stable;

• Buffets Inc., Vertrue LLC, Coach America Holdings Inc., Delta Petroleum Corp. and Eastman Kodak Co. were removed after the companies defaulted;

• Hanley Wood LLC, Dune Energy Inc. and Yell Group PLC were removed after S&P placed the companies on selective default;

• Truvo NV was removed as its parent was added in this month's list; and

• Comboios de Portugal, EPE was removed because of a change in its criteria.

Meanwhile, among those added to the weakest link list,

• Circus and Eldorado Joint Venture was added after S&P downgraded it to CCC- and assigned it a CreditWatch with negative implications;

• Advanstar Inc. was added after the agency downgraded the company to CC and assigned it a negative outlook;

• Greentown China Holdings Ltd., Overseas Shipholding Group Inc. and Penson Worldwide Inc. were added after being downgraded to B-;

• Sears Holdings Corp. was added after being downgraded to CCC+;

• Petroplus Holdings AG was added after being downgraded to CC; and

• SuperMedia Inc. and Talon PIKco NV are newly rated entities.

Of the nine new weakest links, S&P said six are from the United States, two are from Europe and one is from Asia-Pacific.

2011 details

In a separate report titled "Most of the Global Corporate Defaulters in 2011 Were Weakest Links," S&P said weakest links accounted for 41 of the 53 total global corporate defaults in 2011.

Of the 107 weakest links in the beginning of 2011, the ratings agency said 19 entities defaulted in 2011, 52 remained weakest links as of Dec. 31, five are currently rated higher than B-, and the majority has stable or positive outlooks.

Sector breakdown

Based on the number of weakest links, the agency said the media and entertainment, forest products and building materials, banks, and consumer products sectors are most vulnerable to default.

S&P said the media and entertainment sector is the most vulnerable with 31 weakest links, or 23.7% of the total, while forest products and building materials had 13, banks had 12, and consumer products had 11 weakest links.

S&P said U.S.-based issuers account for 64.1% of the 131 weakest links, partially because a large proportion of S&P-rated issuers are in the United States.

By volume, the 84 U.S.-based weakest links account for $127 billion of debt, which is 64.2% of the total $197.7 billion of debt issued by all weakest links.

Leveraged loans

The 12-month-trailing default rate for U.S. leveraged loans remained unchanged at 0.62% in December after plunging from 0.92% in October, S&P said.

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