U.S. high yield default rate falls to 5.7%, S&P says

New York, July 10 - The U.S. high yield default rate fell to 5.7% in the 12 months to June, according to Standard & Poor's. That put it below 6% for the first time since August 2000 and was down from the rate of 6.1% previously reported for May.

The global high yield default rate fell to 5.3%. It was previously reported at 5.8% for May.

For Europe the rate is now 6.7%, down from 8.1% in May.

Since the end of 2002, the global rate has fallen from 9.2%.

S&P said much of the almost four percentage point drop is attributable to emerging markets where the rate has fallen to 3.4% from 15.2% in December 2002 thanks to the early-2002 defaults in Argentina dropping out of the data.

The U.S. rate is down from 7.3% at the end of 2002 while the European rate is down from 13.5%.

Despite the declines, S&P described the underlying economic fundamentals as uninspiring. Industrial production - generally regarded as a fairly good leading indicator of the speculative-grade default rate - continues to drift into negative territory in the U.S. and is close to zero in Europe after several months of positive year-over-year growth, S&P said.

"This dip [in defaults] is most likely attributable to the impact of the Iraq war," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research group, in a news release. "If this trend were to be sustained over a longer period of time, however, fears of a renewed deterioration in credit quality and the default rate could surface."

S&P also noted that 2003 saw its first investment-grade default in June when Australian mining company Newmont Yandal Operations Ltd. selectively defaulted on six of seven hedge contracts.

S&P also said its list of "weakest link" issuers most likely to default now numbers 44, as of July 10, down from 50 on June 5. The current list accounts for $48.9 billion of debt.

The "weakest link" issuers have a credit rating of CCC or lower and either have a negative outlook or are on CreditWatch negative.

From the previous 50, three defaulted, one was upgraded, two are no longer rated and one is listed as developing. One issuer, Mirant Corp., was added to the list.

Meanwhile, S&P said the trend in rating actions continued its favorable trend in the second quarter.

Downgrades outpaced upgrades by the smallest margin since the first quarter of 2000.

The ratio of downgrade to upgrade for all issuers was 3.1 in the second quarter, improved from 4.6 in the first quarter and 4.2 in all of 2002. In total there were 216 downgrades and 69 upgrades compared with 215 downgrades and 47 upgrades in the first quarter. By dollar value, the second quarter's downgrades were $364.4 million against $141.8 billion of upgrades.

"The distribution of outlooks and CreditWatch listings indicates that credit quality retains a favorable bias," commented Vazza, in a news release.

As of June 30, 29.9% of issuers had a negative outlook or were on negative watch compared with 32.3% at the end of March. Meanwhile, the proportion with a positive outlook or on positive watch increased to 7.9% from 7.4%.

The first two quarters have produced a total of 57 defaults on $34.1 billion of debt, S&P said.

The U.S. and its tax havens accounted for 45 of the defaults with Europe having four and Canada three.

© 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.