S&P global corporate junk default rate climbs to 1.88% in August

By Caroline Salls

Pittsburgh, Sept. 17 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate increased to 1.88% in August from 1.83% in July, 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 55 consecutive months.

By region, the U.S. speculative-grade default rate for the 12 months ended in August climbed to 2.5% from 2.37% in July, the rate increased to 1% from 0.98% in Europe and fell to zero from 0.17% in the emerging markets.

The agency said its mean baseline forecast predicts that the U.S. speculative-grade default rate will escalate to 4.9% in the next 12 months from a 25-year low of 0.97% recorded at the end of 2007.

Defaults up

Through Sept. 9, 57 defaults were recorded, affecting debt worth $45.29 billion. S&P said these figures do not include the downgrade of Lehman Brothers Holdings Inc. to selective default following its filing for Chapter 11 bankruptcy protection.

S&P said five companies defaulted in August.

Of these most recent defaults, four were from the United States and one was from Bermuda.

The August defaulters included WCI Communities Inc., BluePoint Re Ltd., Uno Restaurant Holdings Corp., Hines Horticulture Inc. and Mrs. Fields Famous Brands.

According to Wednesday's report, it is no surprise that the U.S. default rates in the financial institution and real estate sectors are relatively higher than others given the current stress that these sectors are undergoing.

In addition, S&P said consumer discretionary sectors like leisure/media, consumer/service and retail/restaurants sectors tend to be particularly vulnerable to cyclical trends in the economy, and the high concentration of weakest links and distressed companies in these sectors points to a continued increase in defaults.

In 2008, about half of the 57 defaults were already from these sectors, S&P reported, and, in the transportation sector, soaring oil prices have taken their toll, particularly on companies with comparatively weak financial profiles.

As the economy continues to deteriorate and oil prices remain high, S&P said it expects to see more defaults in these sectors.

The agency said its pessimistic scenario yields a mean 12-month default rate of 8.5%, nearly double the long-term average of 4.4%, but still below the peak in 2001 to 2002, and the optimistic scenario yields an average default rate of 3.4%, below the long-term average.

According to the report, factors contributing to higher downside risks for U.S. defaults include the unfolding recessionary conditions in the United States; tighter lending conditions and heightened credit-risk volatility; a greater proportion of speculative-grade issuers than at any other point in history; the highest volume of low-rated issuance since 2003; and greater impact of seasoning in the B- or lower rating categories, referring to the phenomenon that companies seldom default during the first few years after accessing the public debt markets.

Weakest links

As of Sept. 9, 162 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 $352.93 billion, marking the seventh straight month that the ratings agency has reported an increase in weakest links.

The current count of weakest links is six 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 43 of the 45 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 15 were added.

Of the nine issuers removed from the list, one defaulted, four were eliminated because of a revision in their outlook/CreditWatch status, two were no longer rated and two were removed because of a combination of a revision in outlook/Credit Watch status to negative and a downgrade.

Of the 15 new weakest links, eight issuers were added because they were downgraded, six 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.

Of the new additions to this month's list, nine were from the United States and three were from Canada. The media and entertainment sector had the biggest increases in weakest links with four, while consumer products had three.

Specifically, S&P said the media and entertainment sector showed the highest vulnerability to default with 34 weakest links, constituting 21% of the list, followed by consumer products with 19, forest products and building materials with 17 and retail and restaurants with 16.

Geographically, S&P said U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 80.2%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 130 U.S.-based weakest links account for $335.12 billion of debt, or almost 95% of the total $352.93 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 59-month high of 3.27% in August, up from 2.92% in July.

The loan distress ratio increased sharply to 17.95% in August from 15.11% in July.

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 three new deals came to market in August totaling $676 million. The average in the first half of 2008 was 14.5 deals per month at $5.4 billion, S&P reported.

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