S&P reports five January U.S. defaults, highest tally in 28 months

By Caroline Salls

Pittsburgh, Feb. 26 - Standard & Poor's reported five January U.S. defaults Tuesday, the highest tally in 28 months.

A total of six defaults affecting $6.3 billion in rated debt were recorded for January, with the one non-U.S. default recorded by a Canadian company, S&P said in a report.

As previously reported, the 12-month trailing global corporate speculative-grade bond default rate for January was 0.98%, up from 0.86% in December.

S&P said the global default rate has been below its long-term 1981 to 2007 average of 4.35% for 48 straight months.

By region, the speculative-grade default rate was recorded at 1.09% in the United States, up from 0.97% in December; 0.95% in Europe and 0.18% in the emerging markets, both the same as in December.

The agency said it expects the U.S. speculative-grade default rate to increase to 4.6% over the next 12 months. The historical average is 4.4%.

S&P said the increase in defaults reflects the cumulative impact of the changes in the credit-pricing environment, earnings deceleration and growing recessionary pressure in the economy.

The agency said it estimates that the U.S. speculative-grade default rate could increase to a high of 5.7% in a pessimistic scenario, or to 3.4% in an optimistic scenario.

Among the U.S. defaults, S&P reported the leisure time/media sector had the highest default rate at 1.16% in the trailing 12 months. Next in line was the health care/chemicals sector, which recorded a default rate of 1.14%, followed by the consumer/service sector with 1.06%.

S&P said financial institutions recorded a default rate of 0.59%.

Companies defaulting in January included Buffets Inc., Buffets Holdings Inc., Tousa Inc., Quebecor World Inc., Propex Inc. and PRC LLC.

In the leveraged loan segment, S&P reported that seven institutional loan issuers defaulted, pushing the 12-month trailing institutional loan default rate to a 13-month high of 1.14% in January from an all-time low of 0.26% in December.

S&P said this increase is the third-largest month-over-month rise in the default rate on record.

According to the report, leveraged-loan defaults are expected to rise in 2008 as the slowing economy and a continued tight lending environment increasingly strain already vulnerable sectors and highly leveraged issuers.

The loan distress ratio - defined as the percent of performing loans trading below 80 cents on the dollar - also continued to increase rapidly, according to S&P, with a 58-month high of 6.92% in January, compared with 3.23% in December.

Weakest links

As of Feb. 8, S&P reported 102 weakest links globally were vulnerable to default on $42.1 billion of combined rated debt.

This latest weakest links was even with the amount reported last month, but it was 11 less than January 2007.

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

S&P said seven issuers were removed from the list since the last report and seven were added.

Of the seven issuers removed from the list, five were eliminated because of a revision in their outlook/CreditWatch status and two issuers defaulted.

Of the seven new weakest links this month, five issuers were added because they were downgraded, one was added because its outlook or CreditWatch were revised to negative and one was a newly rated entity.

With 17 issuers, S&P said the consumer products sector continued to show the highest vulnerability to default among the weakest links, constituting 16.7% of the list, followed by the retail/restaurants sector and the media and entertainment sector with 14.7% of the total weakest-links issuers each.

Geographically, U.S.-based issuers accounted for 80.4% of the total, which S&P said can be attributed to the higher ratings penetration in the U.S. marketplace.

Elsewhere, Europe accounted for 7.8% of the list, Canada accounted for 6.9%, Asia/Pacific accounted for 2.9% and Eastern Europe/Middle East/Africa and Latin America both accounted for 1% of the list.

High-yield issuance

S&P said the market remains hesitant to absorb low-grade debt, resulting in a significant slowdown in the U.S. issuance pipeline. As a result, only two deals worth $850 million came to market in January.

S&P said issuance rated CCC+ or lower as a share of total speculative-grade issuance also remained 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 decreased to 25.75% in January from 26.47% in December.

At Feb. 12, S&P said speculative-grade bond spreads had blown out to 714 basis points, up from 680 bps at Jan. 18.

The agency said the specter of weaker earnings in an overall slower economic environment, as well as mounting defaults and volatility after an extended bull cycle, are the primary factors driving the escalation of the risk premium that investors are demanding.

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