S&P global corporate junk default rate remains at 2.33% in February

By Caroline Salls

Pittsburgh, April 1 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate remained flat at 2.33% in February, the same as in January, according to a report titled "Global Weakest Links And Default Rates: The Weakest Links Count Fell To 145 In March."

Regionally, the U.S. corporate speculative-grade default rate declined to 2.32% for the 12 months ended in February from 2.45% in January, while the European speculative-grade default rate increased noticeably to 2.42% from 1.84%. The emerging markets speculative-grade default rate narrowed marginally to 2.38% from 2.39%.

S&P said 23 issuers defaulted through March 19, including confidential entries. These defaulted issuers have outstanding debt worth $54.3 billion.

In comparison, 85 defaulted issuers had combined outstanding debt worth $86.7 billion in 2012.

The agency said eight non-confidential entities defaulted since its most recent report, including Yioula Glassworks SA, Conexant Systems Inc., hibu plc, GMX Resources Inc., Dex One Corp. and SuperMedia Inc., Rotech Healthcare Inc. and Central European Distribution Corp.

Weakest links decrease

According to the report, the number of global weakest links decreased to 145 as of March 19 from 149 in the previous month. The 145 weakest links have total rated debt worth $221.3 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 14 entities from the weakest links list and added 10 others.

A total of 11 of the weakest links removed from the list are from the United States, two are from Europe and one is from Latin America. Six of the 10 entities added this month were from the United States, two were from Latin America, one was from Canada, and one was from Eastern Europe, the Middle East and Africa.

The following entities were removed from the list:

• Central European Distribution, Dex One, SuperMedia, Rotech, Yioula and hibu were removed after they defaulted;

• iQor Holdings Inc. and MGIC Investment Corp. were removed after they were upgraded and their outlooks revised to stable;

• Jill Holdings LLC and Springleaf Finance Corp. were removed after their outlooks were revised to positive;

• Playboy Enterprises Inc. was removed after it was downgraded and its outlook revised to developing;

• Radian Group Inc. and Sun Products Corp. were removed after their outlooks were revised to stable; and

• Siderurgica del Turbio SA was removed after its rating was withdrawn.

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

• Casella Waste Systems Inc., Exide Technologies and UkrLandFarming plc were added after they were downgraded;

• Harlan Laboratories Inc., Isola USA Corp., Lone Pine Resources Canada Ltd. and Penney (J.C.) Co. Inc. were added when they were downgraded and their outlooks revised to negative;

• Phoenix Cos. Inc. was added when it was revised to CreditWatch negative;

• Metrogas SA was added when it was upgraded and its outlook revised to negative; and

• Urbi Desarrollos Urbanos SAB de CV was added after it was downgraded and revised to CreditWatch negative.

Sector breakdown

The agency said the media and entertainment, oil and gas exploration and forest products sand building materials sectors are most vulnerable to default.

S&P said the media and entertainment sector has the greatest number of weakest links, with 32 entities, or 22.1% of the total. Oil and gas exploration had the next highest number of weakest links, with 14 entities, 9.7% of the total, and the forest products and building materials sector had 12 entities, or 8.3% of the total.

Default rate forecast

S&P said it expects the U.S. corporate trailing-12-month speculative-grade default rate to increase to 3.4% by year-end 2013 from 2.6% as of December.

A total of 54 speculative-grade issuers would need to default in 2013 to reach this projection. By comparison, S&P said 39 speculative-grade entities defaulted in 2012.

The agency said its optimistic default rate forecast assumes faster U.S. economic growth, fueled by a stronger recovery in the housing sector and robust growth in consumer and business spending.

Under this scenario, S&P said it also expects a faster-than-expected improvement in the labor market.

S&P said the default rate would decline to 2.3% in 2013 under the optimistic scenario, or 37 defaults during the next 12 months.

On the other hand, S&P said its pessimistic scenario assumes that the United States reverts back into a recession, with the economy contracting 0.5% in 2013. The agency said the U.S. recession would result from financial contagion from the eurozone, where the recession is longer and deeper than expected in 2013.

According to the report, a significant economic slowdown in the emerging markets as well as the uncertainty related to the U.S. debt ceiling and budget negotiations would also have a direct impact on U.S. growth.

Under this pessimistic scenario, S&P said it expects the default rate to rise to 5.5%, or 88 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, decreased to 1.52% in February from 1.66% in January, S&P reported.

Estimated March results

In addition, S&P said it estimates that the U.S. trailing-12-month speculative-grade corporate default rate has reversed its downward trend after it rose slightly to 2.4% in March from 2.3% in February.

The agency said it expected this uptick in the default rate.

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