S&P: February 1.33% global junk default rate at eight-year low

By Caroline Salls

Pittsburgh, March 9 - The global corporate speculative-grade bond default rate remained at its lowest level in more than eight years, reaching 1.33% for the 12 months ended in February, down from 1.38% in January, according to a Standard & Poor's report.

Speculative-grade default rates were 1.9% in the United States, zero in Europe and 0.21% in the emerging markets.

In the first two months of 2006, four defaults affecting $2.7 billion of rated debt were recorded among entities rated by the agency.

Globally, S&P said the speculative-grade default rate has remained below the long-term 1981 to 2005 average of 4.65% for 25 consecutive months, but is still marginally above the record low of 1.28% posted in the second quarter of 1997.

"The global default rate is expected to edge up slowly from its trough in 2006, but the near-term default outlook is mostly sanguine, owing to expectations of relative economic stability, relatively favorable financing conditions and healthy corporate profitability," Diane Vazza, head of S&P's global fixed-income research group, said in the report.

S&P said results from its 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 and 4.3% by the end of 2007, which is still below its 4.7% long-term average.

Weakest links

As of Thursday, 17 entities remained vulnerable to default on rated debt worth $5.4 billion, the agency said.

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

A total of 18 weakest links were reported in January, with an average of 20 entities recorded over 2005.

United States-based issuers constituted 13 of the 17 weakest link issuers in February.

Since the last edition of S&P's weakest link report, two entities were removed from the list and three issuers were added. The removals were the result of the withdrawal of ratings on Northland Cable Television Inc. and the default by Integrated Electrical Services Inc.

Meanwhile, Exide Technologies, Luxfer Holdings plc and Radnor Holdings Corp. were added to the list because of downgrades.

With four issuers, the media and entertainment sector showed the highest vulnerability to default among the weakest links, constituting 23.5% of issuers, the agency said.

According to the report, as defaults inch higher, spreads should begin to gap out as well, and if the default rate climbs as expected, speculative-grade spreads should be hovering around 445 basis points by the end of February 2007, compared with 365 bps seen at the end of this February.

In the United States, the proportion of lower-grade issuances dipped to 27% in February from 45% in the fourth quarter. In the first two months of 2006, S&P said the proportion of B- issuances has dropped to 23% from 42% for 2005, 43% in 2004 and 31% in 2003.

For the three months ended Feb. 28, the proportion of lower-grade issuances in Europe was 47%, up from 41% in 2005 and 45% 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 January, an 11% net percentage of domestic banks reported easing standards for large and midsize firms - up from 9% in the October survey. Among small firms, the net percentage of banks reporting easing standards for small firms increased to 7% in January from 5% in October.

In addition, S&P said the distress ratio was 6.1% at the end of February, which is slightly less than the 6.2% average for full-year 2005.

Telecom, auto and consumer products weak

Weakness was concentrated in the telecommunications, automotive and consumer products sectors, which together constitute nearly 60% of the total number of distressed issues.

S&P reported that default rates in the U.S. leveraged loan market have also remained muted, though the bankruptcy filing by Calpine Corp. pushed the default rate to 2.09% at the end of February, compared with 1.51% six months earlier and 1.12% at year-end 2004.

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

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

The only default recorded in February was Integrated Electrical Services Inc.

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