S&P December trailing 12-month global junk default rate drops to 1.09%

By Caroline Salls

Pittsburgh, Jan. 17 - Standard & Poor's reported a 1.09% December 12-month trailing global corporate speculative-grade bond default rate, down from 1.19% for the 12 months ended in November.

The global default rate has been below its long-term 1981 to 2006 average of 4.48% for 35 consecutive months, S&P said.

Two defaults were recorded among global corporates rated by S&P since the November report, making a total of 29 corporate defaults in 2006 affecting rated debt worth $7.13 billion.

By region, speculative-grade default rates were recorded at 1.26% in the United States, 2.07% in Europe and 0.38% in the emerging markets.

As of Jan. 11, S&P reported 27 weakest links remained vulnerable to default on combined rated debt worth $11.2 billion, the highest in 27 months. This is one greater than reported last month, and S&P said the number has been rising since April 2006.

By contrast, the full year 2006 and 2005 average is 20 entities, while the average for 2004 is 31 entities.

In addition, S&P said the proportion of high-yield distressed issuers fell to an all-time low of 1.6% for the 12 months ended in December from 2.1% in November.

Liquidity lends support

The ratings agency said distress and defaults continue to be suppressed by abundant liquidity and generous financing provisions.

In 2007, S&P said it still predicts that the default rate will edge up slowly from its 2006 trough, ending the year in the 2.5% to 3.0% range.

S&P also expects the U.S. speculative-grade default rate to remain below the long-term average of 4.54%.

Default rates among U.S. leveraged loans are also projected to increase.

According to the report, the pipeline of low-rated bond issuance remains considerable, with deals rated B- or lower accounting for 35% of total speculative-grade issuance at the end of December, down from 50% in November.

As defaults inch higher, spreads should begin to increase as well, S&P reported, as a simple link between default rates and speculative-grade spreads suggests that if the default rate climbs as expected, then speculative-grade spreads should be hovering at about 440 basis points by the end of 2007, compared with 339 bps at the end of December.

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 bps, inched down to 1.6% in the 12 months ended in December from 2.1% in November, an all-time low spanning a period of 26 years.

Auto, health care segments weak

S&P said weakness is concentrated in the automotive and health care sectors, which together constitute 38% of the total number of distressed issues.

Also, S&P said default rates in the U.S. leveraged loan market declined to 0.79% in December from 1.15% recorded in November and 1.98% recorded 12 months earlier.

Defaults in the next 12 months are expected to remain below average in this segment and to remain largely in check through the first quarter of 2007, S&P reported.

Over the longer term, however, S&P reported that the increasingly aggressive structures of the new-issue market will leave many issuers vulnerable to default when liquidity dries up.

Since last month, Amtrol Inc. and Autocam Corp. defaulted on combined rated debt of $270 million.

Since the November report, Autocam was removed from the weakest links list because it defaulted and ICON Health & Fitness Inc. was removed because it is no longer rated.

Of the three new names added to the list, there was one issuer each from the United States, the United Kingdom and Hong Kong.

Other sectors vulnerable

With four issuers each, S&P said the media and entertainment and forest products and building materials sectors showed the highest vulnerability to default among the weakest links, each constituting 14.8% of the issuers on the most recent list.

Next in line were the consumer products, utilities and automotive sectors with three issuers each, and each constituting 11.1% of the total.

Geographically, U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 23 of 26 issuers, which S&P said is attributable to the higher ratings penetration in the U.S. marketplace.

The three non-U.S. entities are U.K-based Luxfer Holdings plc, Hong Kong-based ASAT Holdings Ltd. and Canada-based Tembec Inc.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.