S&P global junk default rate up to 2.68% in November; 108 defaults, 232 weakest links recorded through Dec. 10

By Caroline Salls

Pittsburgh, Dec. 12 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 2.68% in November from 2.3% in October 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 58 consecutive months.

By region, the U.S. speculative-grade default rate for the 12 months ended in November increased to 3.15% from 2.86% in October, marking the 11th straight month the U.S. rate increased. Meanwhile, the rate was up to 2.01% in Europe from 1.02% in October and rose to 0.98% from 0.82% 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 an average of seven per month in the first 11 months of 2008.

Defaults up

Through Dec. 10, 108 defaults were recorded, affecting debt worth $302 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 20 publicly rated companies defaulted since its most recent report.

The new defaulters included Palmdale Hills Property LLC, Britannia Bulk plc, IT Holding SpA, Mecachrome International Inc., Chesapeake Corp., Lenox Group Inc., Downey Financial Corp., Metaldyne Corp., LandAmerica Financial Group Inc., Alliance Film Holdings Inc., OJSC RBC Information Systems, Constar International Inc., Waterford Wedgwood plc, Trump Entertainment Resorts Holdings LP, PT Mobile-8 Telecom Tbk, Tronox Inc., Finlay Enterprises Inc., Hovnanian Enterprises Inc., Transtel Intermedia SA and Tribune Co.

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, 158 defaults are required to reach the pessimistic default rate forecast and 101 defaults to reach the optimistic forecast.

Weakest links

As of Dec. 10, 232 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 $523.39 billion, marking the 10th straight month that the agency has reported an increase in weakest links.

The current count of weakest links is 25 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 81 of the 89 publicly rated issuers that have defaulted so far this year were weakest links.

Since the last report, 18 issuers were removed from the weakest links list and 43 were added.

Of the 18 issuers removed from the list, 10 defaulted, four were no longer rated, three were eliminated because of a change in their CreditWatch/outlook status and one was upgraded with a favorable revision in its CreditWatch status.

Of the 43 new weakest links, 24 issuers were added because they were downgraded, eight because of a revision of their outlook/CreditWatch status to negative, seven because of a revision of their outlook/CreditWatch status to negative together with a downgrade, three received an active rating from SD rating, and one was due to an improvement in criteria.

Of the new additions to this month's list, 31 were from the United States, seven were from the emerging markets, three were from Europe and two were from Canada. The media and entertainment sector had the biggest increases in weakest links with nine.

Specifically, S&P said the media and entertainment sector showed the highest vulnerability to default with 53 weakest links, constituting 23% of the list, followed by consumer products and forest products and building materials with 21 each, then by retail and restaurants with 18.

Geographically, S&P said U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 75%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 174 U.S.-based weakest links account for $417.93 billion of debt, or almost 80% of the total $523.39 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 51/2-year high of 3.76% in November, up from 3.59% in October.

The loan distress ratio rose sharply to 76% in November from 66% in October.

No low-grade deals

Also, S&P reported that the widespread risk aversion that characterizes current market sentiment put a halt on U.S. high-yield issuance activity, as no new deals came to market in November.

The agency said this continues the lackluster issuance of 2008.

In the third quarter, S&P said only 14 speculative-grade-rated deals totaling $4.4 billion came to market, compared with 66 deals totaling $25.2 billion in the second quarter and an average of 75 deals per quarter totaling $34 billion in 2007.

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