S&P August global corporate junk default rate slips to 1.02%

By Caroline Salls

Pittsburgh, Sept. 11 - Standard & Poor's 12-month trailing global corporate speculative-grade bond default rate dipped slightly to 1.02% in August from 1.06%.

S&P said the global default rate has been below its long-term 1981 to 2006 average of 4.48% for 43 straight months.

By region, the speculative-grade default rates were recorded at 1.27% in the United States, up from 1.21% in July; 1.39% in Europe, down from 1.86% in July; and 0.38% in emerging markets, double July's 0.19% mark.

Three defaults were recorded among global corporates rated by S&P in August, bringing the total to 15 defaults so far for 2007 on rated debt worth $4.5 billion.

The defaults recorded in August were Fedders Corp., ASAT Holdings Ltd. and a confidentially rated company.

In the leveraged-loan segment, S&P said there were no new defaults in August, keeping the year-to-date tally at just one, Bally Total Fitness Corp.

The ratings agency said it continues to forecast that the U.S. speculative-grade default rate will reach 1.4% by the end of 2007, as corporate credit risks continue to increase even though corporate defaults are slow to materialize.

S&P said there is a material risk that defaults could be more severe beyond the one-year forecast horizon, as leaks in the credit markets will continue to sap strength, even though defaults might be staved off in the next six months, in part because of structural concessions that avert payment default.

A 1.4% year-end default rate would imply 11 additional defaults in the United States by December based on data at the end of August, S&P reported.

Year to date, S&P said the United States has recorded 12 defaults, and the ratings agency expects a modestly higher uptick in the second half of the year.

Weakest links

As of Aug. 31, reported 98 weakest links globally were vulnerable to default on $58.4 billion of combined rated debt.

The August weakest links count is nine more than in July.

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

S&P said consumer products, media and entertainment and retail/restaurants continued to show the highest concentrations of weakest-links issuers.

With 17 issuers, S&P said the consumer products sector continued to show the highest vulnerability to default among the weakest links, constituting 17.3% of the list, followed by the media and entertainment sector with 14.3% and retail/restaurants with 12.2% of the total weakest-links issuers.

Three sovereigns, including the Republic of Bolivia, Republic of Ecuador and Republic of Lebanon, are on the list.

Since the last report, S&P said eight entities were removed from the weakest-links list and 17 were added. Of the eight entities removed from the list, three were because of a revision in outlook/CreditWatch status, three were because they were no longer rated and two defaulted.

Of the 17 new entrants this month, eight were added because of a change in their outlook/CreditWatch status, seven were added because of downgrades and two are newly rated entities.

According to the report, market volatility shut down the issuance pipeline in the U.S. speculative-grade market, as issuers faced rising risk aversion and a market hesitant to absorb low-grade issuance.

As a result, S&P said there was no high-yield issuance in August after a measly four new speculative-grade issuances in July.

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 marginally to 25.7% in August, compared with 25.5% in July.

According to S&P, the industrial sector continues to be the leader in issuing low-rated debt through August, with deals worth $32.1 billion, following the trend established in 2006.

Within industrials, retail/restaurants, media and entertainment, health care, high technology and homebuilders and real estate companies took the lead, with each sector issuing more than $3 billion in low-grade issuance in the year to date.

S&P said speculative-grade spreads have widened noticeably in recent weeks as volatility increased and markets re-priced risk.

As of Aug. 31, S&P said spreads stood at 442 basis points, higher than the 417 bps in the previous month. As the default rate gradually increases to 1.4% by year end, with market volatility remaining high at about 25 bps, S&P said speculative-grade spreads could fluctuate within the 450 bps to 475 bps range.

Lending conditions

In addition, S&P reported that lending conditions in the United States did not see much change in July from an April survey, but the upcoming survey is likely to show considerable change because of the recent volatility in the market.

In the July survey, S&P said the respondent banks reported mixed changes in lending standards and terms in the three months through July and somewhat weaker demand for some loan types, mostly because of foreign competition.

S&P said some respondents reported easing terms on commercial and industrial loans for large-, mid- and small-size firms, including easing of covenants and tightening of spreads. However, S&P said those institutions that tightened lending standards cited a less-favorable or more-uncertain economic outlook, a reduced tolerance for risk and decreased liquidity in the secondary market as the most important reasons for the changes in their lending policies.

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