S&P May global corporate junk default rate hits 31-month high of 1.45%

By Caroline Salls

Pittsburgh, June 16 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate hit a 31-month high of 1.45% in May, up from the 1.29% default rate reported in April, according to S&P's latest "Global Bond Markets' Weakest Links and Monthly Default Rates" report.

Although the rate continues to increase, S&P said the default rate has stayed below its long-term 1981 to 2007 average of 4.35% for 52 consecutive months.

By region, the speculative-grade default rate for the 12 months ended in May climbed to 1.89% in the United States from 1.64% in April, held steady at 0.50% in Europe and stayed at 0.17% in the emerging markets.

The agency said its mean baseline forecast predicts that the U.S. speculative-grade default rate will escalate to 4.7% in the next 12 months, from a 25-year low of 0.97% recorded at the end of 2007.

Through June 11, 33 defaults were recorded, affecting debt worth $38.3 billion.

S&P said this default count already exceeds the 22 defaults recorded in all of 2007 and the 30 defaults in 2006.

Of the 33 defaults, 32 were from the United States and one was from Canada.

S&P said six companies defaulted in May, and another company has defaulted so far through June 11, all from the United States.

The three publicly rated defaulters included Herbst Gaming Inc., Greektown Holdings LLC and Residential Capital LLC.

S&P said the increase in defaults reflects the unfolding recessionary conditions, weaker earnings prospects and continued financial pressures that will increase lending constraints.

According to Monday's report, continued financial market volatility, tightening credit conditions, an unfolding housing correction, dollar weakness and the risk of a larger or a smaller impact of the fiscal stimulus package contribute to substantial variability in the default forecast.

S&P warned that there is still a definite risk that defaults could be significantly more pronounced and severe, especially if the recession would be deeper and longer than expected.

The agency said its pessimistic scenario yields a mean 12-month default rate of 8.5%, nearly double the long-term average of 4.4%, but still below the peak in 2001-2002, and the optimistic scenario yields an average default rate of 3.7%, below the long-term average.

S&P said both scenarios have a 20% chance of occurring.

In the next 12 months, 133 defaults are required to reach the pessimistic default rate forecast of 8.5% and 58 defaults are needed to reach the optimistic forecast of 3.7%.

Weakest links

As of June 11, 140 weakest links, defined as issuers rated B- or lower with either a negative outlook or with ratings on CreditWatch negative, were vulnerable to default on rated debt worth $118.5 billion.

The current count of weakest links is 10 more than the number reported last month.

S&P said the increase in weakest links is not surprising given the elevated volatility in the credit markets and the unfolding recessionary conditions in the United States. S&P said 22 of the 33 issuers that have defaulted so far this year were weakest links.

Since the last report, seven issuers were removed from the weakest links list and 17 were added.

Of the seven issuers removed from the list, four were eliminated because of a revision in their outlook/CreditWatch status, and the remaining three defaulted.

Of the 17 new weakest links, 12 issuers were added because they were downgraded, two were added because of a downgrade and revision of their outlook/CreditWatch status to negative and three were added because their outlook/CreditWatch status was revised to negative.

All but two additions to this month's list were from the United States, and the media and entertainment sector had the biggest increase in weakest links with four, followed by transportation and consumer products with three each.

By sector, S&P said media and entertainment, consumer products and retail/restaurants continue to show the most vulnerability with the highest concentration of weakest links for the 12th consecutive month.

Specifically, S&P said the media and entertainment sector showed the highest vulnerability to default with 26 weakest links, constituting 18.6% of the list, followed by the consumer products sector with 19 weakest links.

Geographically, S&P said U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 83.6%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 117 U.S.-based weakest links account for $106 billion of debt, or almost 90% of the total $118 billion of debt issued by all weakest links.

In the leveraged-loan segment, S&P reported that the 12-month trailing institutional loan default rate reached a 56-month high of 2.51% in May, up from 1.95% in April and 0.29% a year ago.

The loan distress ratio declined moderately to 14.01% in May from 15.63% in April.

Low-grade debt deals gaining

Also, S&P reported that issuance activity in the U.S. high-yield market is slowly gaining momentum with much of the deal flow concentrated on better credits.

A total of 27 speculative-grade deals totaling $12.61 billion came to market in May, better than the average of five deals per month in the first quarter of 2008.

According to S&P, the lackluster demand for lower-rated bonds reflects the widespread risk aversion that has characterized the market in recent months.

In the trailing six months, the share of new issues rated B- and lower as a proportion of total speculative-grade issuance decreased to 14.93% in May from 30.77% in April.

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