S&P expects U.S. speculative-grade default rate to hit 3.4% in 2013

By Caroline Salls

Pittsburgh, Jan. 31 - Standard & Poor's expects the U.S. corporate trailing-12-month speculative-grade default rate to increase to 3.4% by the end of 2013, according to a report released Thursday.

S&P said its baseline projection is lower than the long-term 1981 to 2012 average of 4.5%.

A total of 54 speculative-grade issuers, defined as issuers rated BB+ and lower, would need to default in 2013 to reach the projection. In comparison, 39 speculative-grade entities defaulted in 2012.

The agency said its baseline forecast is partly based on the assumptions that U.S. economy will grow by 3% in 2013 and the unemployment rate will decline to 7.3%.

S&P said the Bureau of Economic Analysis' advanced estimate for real GDP growth in 2012 was 2.2%. And, according to the Bureau of Labor Statistics, more than 1.5 million jobs were created in 2012, indicative of the continuing improvement in the labor market.

In addition, S&P said, businesses continued to hire despite the uncertainty regarding the U.S. fiscal cliff toward the end of 2012 and the presidential elections before that.

"We believe that the potentially stronger economic recovery in 2013 is encouraging and should help companies expand their business and improve their bottom lines," the report said.

Alternate scenarios

S&P 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, the agency said it would also expect a faster-than-expected improvement in the labor market.

As a result of these factors, S&P said it would expect the default rate to decline to 2.3% in 2013, requiring 37 defaults during the next 12 months.

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

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, S&P said.

Under the pessimistic scenario, S&P expects the default rate to rise to 5.5%, requiring 88 defaults during the next 12 months.

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