S&P lists post-recession default trends, tracks non-financial defaults

By Caroline Salls

Pittsburgh, Oct. 12 - Three U.S. non-financial issuers defaulted in September, raising the 2010 year-to-date U.S. non-financial default tally to 41, according to a Standard & Poor's report entitled "U.S. Nonfinancial Corporate Defaults Decline to Ten in Third-Quarter 2010."

On a quarterly basis, S&P said the third quarter of 2010 continued the trajectory of a deceleration in the pace of defaults at 10 defaulted issuers, compared with 19 in the first quarter and 12 in the second quarter.

The ratings agency said the reason for defaults last month were mixed. Workflow Management Inc. filed for Chapter 11 bankruptcy, Graceway Pharmaceuticals LLC missed an interest payment, and Wastequip Management Inc. exercised its payment-in-kind toggle option on its mezzanine loan, which S&P considered tantamount to default.

Missed interest and principal payments lead this year's defaulters at 15 issuers, followed by bankruptcies at 13 issuers, distressed exchanges at 12 issuers and payment-in-kind option execution at one issuer.

At this time last year, distressed exchanges led defaults at 61 issuers, followed by missed interest and principal payments at 51 issuers and bankruptcies at 46 issuers.

S&P said the media and entertainment sector continues to lead this year's concentration of defaults at 12 issuers followed by capital goods and natural resources with six issuers each. The retail and restaurant subsector trails with five issuers, while remaining subsectors have less than three defaults each.

According to the report, the National Bureau of Economic Research announced last month that the recession officially ended in the second quarter of 2009.

Since then, S&P said it discovered that the default rate peak lagged the recession's end by several months, a normal trend seen in every recession since the agency's data series began in 1981.

In addition, S&P said the decline in U.S. non-financial weakest links preceded the decline in default rate, and those weakest links are now at their lowest levels since September 2007.

S&P said this means defaults were largely concentrated at the lowest levels of credit quality and have been stabilizing in recent months.

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