S&P global junk default rate up to 2.32% in April; weakest links down

By Caroline Salls

Pittsburgh, June 7 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate increased to 2.32% in April from 2.26% in March, according to a report titled "Global Weakest Links And Default Rates: The Weakest Links Count Decreased To 136 Issuers In May."

Regionally, the U.S. corporate speculative-grade default rate declined to 2.39% for the 12 months ended in April from 2.46% in March, while the European speculative-grade default rate increased to 2.68% from 2.39%. The emerging markets speculative-grade default rate jumped to 2.37% from 2.11%.

S&P said 36 issuers defaulted through May 23, including confidential entries. These defaulted issuers have outstanding debt worth $64.8 billion.

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

The agency said five non-confidential entities defaulted since its most recent report, including Synagro Technologies Inc., Corporacion GEO SAB de CV, Mastro's Restaurants LLC, Physiotherapy Associates Inc. and AGY Holding Corp.

Weakest links decrease

According to the report, the number of global weakest links decreased by 10 issuers to 136 as of May 23. The 136 weakest links have total rated debt worth $211.8 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 18 entities from the weakest links list and added eight others.

A total of 15 of the weakest links removed from the list are from the United States, two are from Europe and one is from Latin America. Of the entities added this month, seven are from the United States and one is from Europe.

The following entities were removed from the list:

• Advanstar Inc., MBIA Inc., SPG Land (Holdings) Ltd., Thomas Cook Group plc and Clondalkin Industries BV were removed because they were revised to CreditWatch positive;

• SRE Group Ltd., Atrium Cos. Inc., Educate Inc., Wallace Theater Holdings Inc. and Xinergy Corp. were removed after their ratings were withdrawn;

• Beazer Homes USA Inc., Hopson Development Holdings Ltd. and American Rock Salt Co. LLC were removed when their outlooks were revised to stable;

• Corporacion GEO, Synagro and AGY were removed when they defaulted; and

• Builders FirstSource Inc. and Central European Media Enterprises Ltd. were removed when their ratings were upgraded and their outlooks revised to stable.

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

• American Residential Services LLC, Arctic Glacier LLC, Norske Skogindustrier ASA and Earthbound Holdings III LLC were added when their outlooks were revised to negative;

• Unavita Health Inc. and infoGroup Inc. were added when their ratings were downgraded and their outlooks revised to negative;

• US Xpress Enterprises Inc. was added when it was downgraded and revised to CreditWatch negative; and

• Dex Media Inc. is newly rated.

Sector breakdown

The agency said the media and entertainment, oil and gas exploration and bank sectors are most vulnerable to default.

S&P said the media and entertainment sector has the greatest number of weakest links, with 17 entities, or 20% of the total. Oil and gas exploration had the next highest number of weakest links, with 14 entities, 10.3% of the total, and the banks sector had 12 entities, or 8.8% 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 3.3% in March 2014 from 2.5% in March of this year.

A total of 54 speculative-grade issuers would need to default from April through March 2014 to reach this projection. In comparison, 38 speculative-grade entities defaulted in the 12 months ended in March.

The agency said its optimistic default rate forecast assumes U.S. real GDP growth of 3.2% in 2013, fueled by a stronger recovery in the housing sector and robust growth in consumer and business spending.

In this scenario, S&P said the growth in consumer spending would be supported by a faster improvement in the labor market, with the unemployment rate declining to less than 7% by the third quarter of 2013.

The agency said it would expect the default rate to remain essentially flat at about 2.5% through March 2014 under this scenario. This scenario would require 41 defaults over 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, declined to 1.67% in April from 1.83% in March, S&P reported.

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