S&P: Global speculative-grade default decreases to 2.57% in October

By Caroline Salls

Pittsburgh, Dec. 3 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate fell to 2.57% in October from 2.73% in September, according to a report titled "Global Weakest Links And Default Rates: The Weakest Links Count Increases To 145 Following Argentina's Downgrade."

Regionally, the U.S. corporate speculative-grade default rate also declined to 2.75% for the 12 months ended in October from 3.01% in September, while the European speculative-grade default rate fell slightly to 2.31% from 2.33%. The emerging markets speculative-grade default rate rose to 2.35% from 2.24%.

S&P said 74 issuers have defaulted through Nov. 19, including confidential entries. These defaulted issuers have outstanding debt worth $74.9 billion.

In comparison, S&P said 53 defaulted issuers had combined outstanding debt worth $87.7 billion in 2011.

The agency said eight non-confidential entities defaulted since its most recent report, including AMF Bowling Worldwide Inc., LBI Media Inc., hibu plc, James River Coal Co., The New Reclamation Group Pty Ltd., Overseas Shipholding Group Inc., Edison Mission Energy and Allen Systems Group Inc.

Weakest links increase

According to the report, the number of global weakest links increased to 145 as of Nov. 19 from 139 as of Oct. 24. The 145 weakest links have total rated debt worth $233.2 billion.

Weakest links are issuers rated B- and lower with either negative outlooks or ratings on CreditWatch with negative implications.

Since its most recent report, S&P said it removed 10 entities from the weakest links list and added 16 others.

Five of the weakest links removed from the list are from the United States, two are from Europe, and one each is from Latin America, Canada and Eastern Europe and the Middle East and Africa. Of the 16 new weakest links added, 12 Argentina-based entities were added following the downgrade of Argentina, three were added from the United States, and one was added from Canada.

The following entities were removed from the list:

• Schoeller Arca Systems Holding BV and Ainsworth Lumber Co. Ltd. were removed after S&P revised the rating outlook on each company to stable;

• hibu and The New Reclamation Group were removed after S&P lowered the ratings on the companies to SD;

• AMF Bowling Worldwide, Edison Mission Energy, LBI Media and Overseas Shipholding Group were removed after S&P lowered the ratings on the companies to D; and

• Grupo Farias (Administradora Baia Formosa SA) and FriendFinder Networks Inc. were removed after the agency withdrew the ratings on the companies.

Meanwhile, S&P added the following entities to the list:

• CAPEX SA, Mastellone Hermanos SA, RAGHSA SA, Hidroelectrica Piedra del Aguila SA and Innovation Ventures LLC were added after S&P revised the rating outlooks to negative;

• Banco de Galicia y Buenos Aires SA, Aeropuertos Argentina 2000 SA, Banco Hipotecario SA, CLISA-Compania Latinoamericana de Infraestructura & Servicios SA, IRSA Inversiones y Representaciones SA, Aurora Diagnostics Holdings LLC, Black Press Ltd., Transportadora de Gas del Sur SA, Banco Patagonia SA and Banco de la Provincia de Buenos Aires SA were added after S&P lowered the ratings on the companies to B- from B and assigned a negative outlook; and

• Edison Mission Marketing & Trading Inc. was added after S&P lowered the ratings on the parent company, Edison Mission Energy, to D.

Sector breakdown

By sector, the media and entertainment, bank and utilities sectors are most vulnerable to default.

S&P said the media and entertainment sector has the greatest number of weakest links, with 37 entities, 25.5% of the total. Banks have the next highest number of weakest links, with 11 entities, 7.6% of the total, and the utility sector has 10 entities or 6.9% of the total.

Default rate forecast

S&P said its baseline forecast is for a 12-month-forward speculative-grade default rate of 3.7% in the United States.

To realize the baseline projection, a total of 58 speculative-grade-rated issuers would need to default during the 12 months ending in September 2013.

The agency said its optimistic default rate forecast assumes a much improved U.S. economy, buoyed by U.S. lawmakers agreeing on a sound deficit-reduction plan, a faster-than-expected improvement in the labor market, which would spur consumer spending, and stronger growth abroad.

As a result, S&P said it would expect the default rate to decline to 2.5% by September 2013, or 39 defaults during the next 12 months.

On the other hand, S&P said its pessimistic scenario assumes that the United States reverts back into recession in the next few quarters, succumbing to the threat of the fiscal cliff as U.S. lawmakers face political gridlock.

Under this pessimistic case, S&P said it expects the default rate to rise to 5.7%, or 90 defaults during the next 12 months.

Leveraged loans

The 12-month-trailing default rate for U.S. leveraged loans, which is based on the number of loans, increased to 1.21% in October from 1.06% in September, S&P reported.

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