S&P global junk default rate continues climb, reaching 2.04% in September

By Caroline Salls

Pittsburgh, Oct. 21 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate increased to 2.04% in September from 1.84% in August, according to S&P's latest "Global Bond Markets' Weakest Links and Monthly Default Rates" report.

S&P said the default rate has stayed below its long-term 1981 to 2007 average of 4.35% for 56 consecutive months.

By region, the U.S. speculative-grade default rate for the 12 months ended in September climbed to 2.68% from 2.44% in August, the rate fell slightly to 0.99% from 1% in Europe and rose to 0.17% from zero in the emerging markets.

The agency said its mean baseline forecast predicts that the U.S. speculative-grade default rate will escalate to 7.6% in the next 12 months from a 25-year low of 0.97% recorded at the end of 2007.

To reach the baseline forecast of 7.6%, S&P said 125 issuers must default in the next 12 months, for an average of 10.4 defaults per month, compared with the 6.7 per month average in the first nine months of 2008.

Defaults up

Through Oct. 15, 75 defaults were recorded, affecting debt worth $226 billion. S&P said the rise in defaults in 2008 is in sharp contrast with trends in previous years, when only 22 defaults were recorded in all of 2007 and 30 in 2006.

S&P said 15 companies defaulted in September and the first half of October.

The September/October defaulters included publicly rated companies LBREP/L SunCal Master I LLC, Motor Coach Industries International Inc., UTGR Inc., Lehman Brothers Holdings Inc., HRP Myrtle Beach Holdings LLC, Washington Mutual Inc., Ashton Woods USA LLC, Corporacion Durango SAB de CV, Baseline Oil & Gas Corp., Controladora Comercial Mexicana SAB de CV, Glitnir Bank, Viskase Cos. Inc., Majestic Star Casino LLC and 3D-Gold Jewellery Holdings Ltd.

According to Tuesday's report, investment-grade rated financials, including Lehman Brothers and Washington Mutual, accounted for more than three-quarters of the debt affected by defaults, while defaults from the speculative-grade segment accounted for about $35 billion.

Under two alternative economic scenarios, the pessimistic default scenario yields a mean default rate of 9.6%, more than double the long-term average of 4.4% but still below the peaks of 10.8% in the 2001-2002 recession and 12.5% in the 1991-1992 recession. Meanwhile, the optimistic scenario yields an average default rate of 6.1%.

In the next 12 months, 157 defaults are required to reach the pessimistic default rate forecast, and 99 defaults to reach the optimistic forecast.

Weakest links

As of Oct. 15, 181 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 $388.52 billion, marking the eighth straight month that the ratings agency has reported an increase in weakest links.

The current count of weakest links is 19 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 added that 54 of the 61 publicly rated issuers that have defaulted so far this year were weakest links.

Since the last report, nine issuers were removed from the weakest links list and 28 were added.

Of the nine issuers removed from the list, four defaulted, four were eliminated because of a revision in their outlook/CreditWatch status and one was no longer rated.

Of the 28 new weakest links, 17 issuers were added because they were downgraded, nine were added because of a downgrade and revision of their outlook/CreditWatch status to negative and the remaining one was added because of a revision in its outlook/CreditWatch status to negative and rating downgrade. The final weakest link was Uno Restaurant Holdings Corp., which was upgraded to CCC from D after it decided to make an Aug. 15 interest payment before the 30-day grace period expired.

Of the new additions to this month's list, 17 were from the United States, seven from the emerging markets, three were from Europe and one was from Canada. The media and entertainment sector had the biggest increases in weakest links with seven, followed by forest products and building materials with three.

Specifically, S&P said the media and entertainment sector showed the highest vulnerability to default with 40 weakest links, constituting 22% of the list, followed by consumer products with 19, then by forest products and building materials and retail and restaurants with 18 each.

Geographically, S&P said U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 77.3%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 140 U.S.-based weakest links account for $346.3 billion of debt, or almost 90% of the total $388.52 billion of debt issued by all weakest links.

Leveraged loans

In the leveraged-loan segment, S&P reported that the 12-month trailing institutional loan default rate reached a 57-month high of 3.32% in September, up from 3.27% in August.

The loan distress ratio increased sharply to 26.27% in September from 17.95% in August.

Low-grade debt deals thin

Also, S&P reported that issuance activity in the U.S. high-yield market remained thin, reflecting the widespread risk aversion that has characterized the current market.

In the United States, only four new deals came to market in September totaling $996 million, summing up the third-quarter average of 14 deals totaling $4.4 billion, S&P reported.

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