S&P reports global corporate junk default rate drops to 4.51% in July

By Caroline Salls

Pittsburgh, Aug. 16 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate dropped to 4.51% in July from 5.05% in June, marking the eighth straight month that the rate has declined, according to a report titled "Global Bond Markets' Weakest Links and Monthly Default Rates."

By region, the agency said the U.S. speculative-grade default rate decreased to 5.48% in July from 5.94% in June. The default rate in Europe decreased significantly to 3.74% from 6.01%, while the emerging markets default rate increased to 1.93% from 1.77%.

Through Aug. 10, S&P said that 54 issuers have defaulted, affecting debt worth $33.51 billion. In 2009, 264 issuers defaulted, affecting debt worth $627.7 billion.

Of the 54 defaults in 2010, 38 are from the United States, three each are from Canada and New Zealand, two each are from Russia and Argentina and one each is from Australia, Ireland, the Netherlands, Indonesia, Hong Kong and Bahrain.

The non-confidential defaults recorded since S&P's most recent report included Titan Petrochemicals Group Ltd., American Safety Razor Co. LLC, LNR Property Corp. and Penhall International Corp.

Weakest links declining

In addition, S&P said the number of global weakest links, defined as issuers rated B- or lower with a negative outlook or ratings on CreditWatch negative, continues to decline.

As of Aug. 10, there were 133 weakest links, down from 141 the previous month and 278 a year ago.

S&P said that the 133 weakest links have combined rated debt worth $146.07 billion.

Since S&P's most recent report, 13 issuers were removed from the list of weakest links and five were added.

Of the issuers removed from the list, eight were the result of a favorable revision to their CreditWatch/outlook status, three defaulted, and two were removed because their ratings were withdrawn.

Of the five new weakest links, four were added after S&P revised their CreditWatch/outlook status, and one was newly rated.

By volume, S&P said the 93 U.S.-based weakest links account for $124.53 billion of debt, or almost 85% of the total $146.07 billion of debt issued by all weakest links.

According to the report, the United States leads in the number of weakest links, with 70%.

Sector breakdown

S&P said the media and entertainment sector showed the greatest vulnerability to defaults, with 29 weakest links, constituting 22% of the total, while oil and gas exploration and production had 11, and banks and finance companies had nine each.

S&P's year-end 2010 baseline projection for the U.S. corporate speculative-grade default rate is 2.8%. To realize the baseline projection, a total of 41 speculative-grade issuers must default in the next 12 months, for an average of 3.4 defaults per month.

Under two alternative economic scenarios, S&P said its pessimistic scenario yields a mean corporate default rate of 4.5%, while the optimistic scenario yields an average corporate default rate of 2.5%.

From July 2010 to June 2011, 65 issuers must default to reach the pessimistic default rate forecast of 4.5%, and 37 issuers must default to reach the optimistic forecast of 2.5%.

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