S&P global junk default rate climbs to 8.58% in July; defaults at 201

By Caroline Salls

Pittsburgh, Aug. 18 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 8.58% in July from 8.25% in June and is now more than 10 times the 25-year low of 0.79% recorded in November 2007, according to S&P's latest "Global Bond Markets' Weakest Links and Monthly Default Rates" report.

By region, the U.S. speculative-grade default rate increased for the 20th consecutive month, with the U.S. rate increasing to 9.37% for the 12 months ended in July from 9.25% in June.

Meanwhile, the rate increased to 6.12% from 5.13% in Europe and was up to 6.7% in the emerging markets from 6.48% in June.

The agency said it expects the U.S. corporate speculative-grade default rate to fall slightly to 13.9% by June 2010 from its peak in the quarter before that.

S&P said these projections represent a near 13% increase from the trough of the default rate in December 2007, the highest rate of increase observed in any prior default rate cycle since the start of the series in 1981.

The ratings agency said the considerable volume of defaults that have materialized, which it expects to continue, should partially alleviate the default pipeline by the middle of 2010.

The current record for the U.S. corporate speculative-grade default rate is 12.54%, recorded in July 1991, S&P reported.

To realize the baseline projection of 13.9%, S&P said 197 issuers must default from July 2009 to June 2010, for an average of 16.4 defaults per month and 49.2 defaults per quarter.

New defaults rising

Through Aug. 12, 201 defaults were recorded, affecting debt worth $453.1 billion. In comparison, S&P said 126 defaults were recorded in all of 2008, affecting debt worth $433 billion.

The new defaulters since S&P's most recent report included CEVA Group plc, PT Gajah Tunggal Tbk, Kellwood Co., Headwaters Inc., Arclin Canada Ltd., Treofan Holdings GmbH, Pier 1 Imports Inc., FairPoint Communications Inc., Unisys Corp., Alfa Bank Ukraine, China Glass Holdings Ltd., Accuride Corp., Commercial Vehicle Group Inc., Haights Cross Communication Inc., Peach Holdings Inc., American Achievement Corp. and Duane Reade Inc.

Alternative scenarios

Under two alternative economic scenarios, the pessimistic default scenario yields a "catastrophic" mean default rate of 18%. Meanwhile, the optimistic scenario yields an average default rate of 11.40%.

In the next 12 months, 255 defaults are required to reach the pessimistic default rate forecast and 161 defaults to reach the optimistic forecast.

Weakest links

As of Aug. 12, 278 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 $302.4 billion.

S&P said the decrease from 285 weakest links in July was largely attributable to the sharp rise in defaults, many of which were weakest links. The ratings agency said this is a trend that will likely continue for some time.

The current count of weakest links is seven less than the number reported last month.

S&P added that 163 of the 180 publicly rated companies that have defaulted so far in 2009 were weakest links.

Since the last report, 22 issuers were removed from the weakest links list and 15 were added.

Of the 22 issuers removed from the list, 11 defaulted, four were removed because S&P withdrew their ratings, and seven were removed because of a change in their CreditWatch/outlook status.

Of the 15 new weakest links, 10 issuers were added because they were downgraded, three because of a revision of their outlook/CreditWatch status to negative, and two are newly rated.

Of the new additions to this month's list, 10 were from the United States, two were from Europe and one each was from Singapore, Uzbekistan and Mexico.

The media and entertainment, high technology, consumer products and insurance sectors had the biggest increases in weakest links, with two issuers each.

Sector breakdown

S&P said the media and entertainment sector showed the greatest vulnerability to defaults, with 48 weakest links, constituting 17% of the total, followed by forest products and building materials and banks with 21 weakest links each.

The agency said issuers in these sectors are particularly vulnerable to cyclical downtrends in the macroeconomic environment.

Geographically, S&P said U.S.-based issuers featured disproportionately on the weakest-links list, accounting for 70%, which the agency attributed to the higher ratings penetration in the U.S. marketplace.

By volume, the 195 U.S.-based weakest links account for $236.32 billion of debt, or almost 78.14% of the total $302.42 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 increased to an 80-month high of 6.87% in July from 6.21% in June.

The loan distress ratio decreased to 33.99% in July from 42.91% in June.

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