S&P global junk default rate dips to 1.2% in May

By Caroline Salls

Pittsburgh, June 15 - Standard & Poor's global corporate speculative-grade bond default rate dipped to 1.2% for the 12 months ended in May from 1.25% the month before.

The ratings agency said the global junk default rate has been below its long-term 1981 to 2006 average of 4.48% for 40 consecutive months.

By region, the speculative-grade default rates in May were 1.44% in the United States, 1.87% in Europe and 0.36% in emerging markets.

In the United States, the highest default rates by industry in the trailing 12 months were recorded in the forest/building products and homebuilders sectors.

S&P recorded two defaults in May, including Insight Health Services Corp. and North Atlantic Holding Co. Inc., bringing the year-to-date default total to 10, affecting rated debt worth about $2 billion.

As of June 12, S&P reported 97 global weakest links were vulnerable to default on combined rated debt worth $61.3 billion, four fewer than last month.

Consumer products, media and entertainment and retail/restaurants showed the highest concentration of weakest-links issuers, S&P said.

Weakest-link issuers are defined as issuers rated B- or lower with either a negative outlook or ratings on CreditWatch with negative implications.

In addition, S&P said the proportion of high-yield distressed issuers increased marginally to 0.9% in May from 0.8% in April, as S&P said distress and defaults continue to be suppressed by abundant liquidity and generous financing provisions.

According to S&P's forecast, the U.S. speculative-grade default rate will increase throughout the year, reaching 2.3% by year-end 2007 and 2.5% by the first quarter of 2008.

By number of issuers, S&P said the pipeline of U.S. low-rated bond issuance among deals rated B- or lower to total speculative grade in the trailing six months decreased to 48.1% in May from 48.7% in April, and, by volume, the proportion of U.S. low-rated bond issuance among deals rated B- or lower to total speculative grade in the trailing six months increased to 43.3% in May from 38.9% in April.

S&P said issuance rated CCC+ or lower as a share of total speculative-grade issuance also remains elevated since its sharp run up in 2004, as the share of new issues rated CCC+ and lower as a proportion of total speculative-grade issuance in the trailing six months increased to 24.3% in May from 23.6% in April.

As defaults inch higher, S&P said spreads should begin to increase as well, as a simple relationship between spreads and defaults suggests that S&P's default rate forecast of 2.3% by year-end 2007 would be associated with spreads of about 350 basis points, compared with 267 bps at the June 12 reading.

S&P also reported that 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, remained low at 0.9% in May from 0.8% in April, registering below 1% for three straight months.

Abundant liquidity continues to be a mitigating factor in the current corporate credit environment, the agency said, and, on a year-over-year basis through May, the distress ratio is down 75%, and the 12-month moving average is also at an all-time low of 2.01%.

Lending conditions

S&P said the decline in the speculative-grade default rate has been accompanied by a visible easing of lending conditions, especially in the United States.

In April, S&P said domestic banks reported a net easing of lending standards for large- and mid-sized firms, after two quarters of neutral reading. Among small firms, banks continued to tighten standards after continued easing since the fourth quarter of 2003.

The U.S. leveraged-loan market's default-free streak reached six months in May, the longest streak on record. By number of loans, S&P said the lagging 12-month loan default rate narrowed to a record low of 0.29% in May, down from 0.44% in April.

S&P said default rates are being suppressed by strong earnings among institutional issuers and continued liquidity, which has enabled issuers to refinance or amend deals rather than face bankruptcy.

Weakest link details

In weakest links news, since the last report, 10 entities were removed from the list and six were added.

With 18 issuers, the consumer products sector showed the highest vulnerability to default among the weakest links, comprising 18.6 % of the list. Next, were the media and entertainment and retail/restaurants sectors, with 15 and 10 issuers, respectively, and comprising 15.5% and 10.3%, respectively, of the total.

Geographically, U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 74% of the total entities. S&P said this can be attributed to the higher ratings penetration in the U.S. marketplace.

Europe accounted for 9% of the total issuers.

According to the agency, the industrial sector continues to be the leading issuer of low-rated issues through May, with deals worth $22.6 billion, following the trend established in 2006.

Within industrials, retail/restaurants, high technology, homebuilders and real estate companies, media and entertainment, automotive, aerospace and defense, forest products and building materials, integrated oil and gas, health care and transportation sectors took the lead, with each sector issuing more than $1 billion in low-grade issuance in the year to date.

In Europe, by contrast, the ratio of low-rated issuance by number of issuers as a share of total speculative-grade issuance in the trailing six months remained below 30% for the fourth consecutive month since the beginning of 2004 to 18.2% in May from 25.7 % in April.

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