S&P: Global junk bond default rate hits 1.35%, eight-year low for 12 months ended December

By Caroline Salls

Pittsburgh, Jan. 6 - The global corporate speculative-grade bond default rate slipped to a new eight-year low of 1.35% for the 12 months ended in December, compared with 1.40% in November, according to a Standard & Poor's report.

The global speculative-grade default rate has remained below the long-term 1981 to 2004 average of 4.96% for 25 consecutive months but is still higher than the record low of 1.28% posted in the second quarter of 1997.

In the United States, there was increased default experience during much of the third quarter, but it has eased during the fourth quarter.

Results from a proprietary default forecast model indicate that U.S. speculative-grade default rates will continue to edge up slowly in the next few quarters, reaching 2.9% by the fourth quarter of 2006. S&P said the 2.4% average forecast for the next four quarters, however, is slightly higher than the 2.0% historical average of the trailing four quarters.

18 vulnerable to default

As of Friday, S&P said a total of 18 entities remained vulnerable to default on $14.2 billion of rated debt, which is even with one month earlier but lower than the average of 20 entities recorded over full-year 2005.

These weakest-link issuers are defined as issuers rated CCC or lower with either a negative outlook or ratings on CreditWatch negative.

U.S.-based issuers constituted 15 of 18 weakest link issuers, according to the report.

In th United States and Europe, a rising proportion of lower-grade issuance (B- or lower as a share of total speculative-grade issuance) beginning in 2003 serves as an early warning of renewed default pressure within two years, S&P said.

In the United States, the proportion of lower-grade issuance edged up in the fourth quarter to 46%, and the ratio for full-year 2005 remains high at 42% compared with 43% in 2004. At 39%, the proportion of lower-grade issuance was also high in Europe in 2005; although slightly slower than the 45% pace set in 2004.

S&P said the decline in the speculative-grade default rate has been accompanied by a visible easing of lending conditions, especially in the United States, as reported in the Federal Reserve Loan Officer Opinion Survey on Bank Lending Practices.

In the latest survey, conducted in October, a 9% net percentage of domestic banks reported easing standards for large and midsize firms - down from 17% in the July survey.

Among small firms, the net percentage of banks reporting easing standards for small firms decreased to 5% in October from 11% in July. Furthermore, the proportion of distressed credits in the United States - defined as speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 basis points, declined in 2003 and appears to have bottomed out in 2004 and the majority of 2005. The distress ratio was 6.4% at the end of December, which is less than the 7.0% average for full-year 2004, but slightly higher than the 6.2% average for 2005.

Telecom, auto, consumer products sectors weak

Weakness was concentrated in the telecommunications, automotive and consumer products sectors, which together constitute more than 50% of the total number of distressed issues.

S&P said default rates in the U.S. leveraged loan market have also remained muted, though bankruptcy filings by Calpine Corp. pushed the default rate to 1.98% at the end of December compared with 1.65% in November and 1.12% at year-end 2004.

Defaults in the next 12 months are expected to remain below average in this segment, according to S&P, with default rates sliding back to 1.25% by December 2006.

The United States recorded a speculative-grade default rate of 1.88%, which is also lower than its long-term average of 4.89%. European speculative-grade default rates remained low at 0.56% at the end of November versus 1.23% 12 months earlier.

In the emerging markets, a 0.21% default rate was recorded at the end of December versus 0.90% six months earlier. One default in the emerging markets has been observed in the trailing 12 months, Administracion Nacional De Combustibles Alcohol Y Portland of Uruguay.

In the United States, the highest default rates by industry in the trailing 12 months were recorded in the transportation sector.

In 2005, 37 defaults were recorded, affecting $42 billion of rated debt compared with a total of 49 defaults in 2004 affecting $16.2 billion of debt.

Calpine, Curative Health only December defaults

In December, only two defaults were recorded, Calpine Corp. and Curative Health Services Inc.

Of the total recorded in the year to date, the United States recorded 32 defaults affecting $41.6 billion of rated debt. Five other defaults recorded in 2005 were based in Japan, Canada, Sweden and Uruguay.

After a sharp run-up in 2004, S&P said issuance rated CCC+ or lower has stabilized at a high level in the year to date, reaching 17.6% as a share of total speculative-grade issuance during 2005 from 16.4% in 2004 and 8.3% in 2003. In full-year 2005, the share of issuance volume rated B- or lower to total speculative-grade issuance was especially high in the broadly defined industrial sector.

More specifically, health care was the leading issuer in the year-to-date, with $3.9 billion in issuance occurring in the corporate health care segment, where consolidation opportunities and share repurchases head the list of reasons for health care companies to increase their debt usage.

In addition, other industrial subsectors - such as media and entertainment and retail/restaurants - each issued more than $2 billion during 2005.

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