S&P global junk default rate falls to 2.00% in June; weakest links up

By Caroline Salls

Pittsburgh, Aug. 3 - Standard & Poor's 12-month-trailing global corporate speculative-grade default rate fell to 2.00% in June from 2.18% in May, according to a report entitled "Global Weakest Links and Default Rates: Corporate Default Rate Declines To 2%, Lowest Since 3Q 2008."

Regionally, the U.S. speculative-grade corporate default rate decreased to 2.25% in June from 2.53% in May. In Europe, the default rate fell slightly to 0.91% from 0.93% in May, and the emerging markets default rate decreased to 0.85% in June from 1.03% in May.

S&P said only 21 issuers had defaulted this year through June 22. Together, these 21 issuers have affected debt worth $43.2 billion.

Issuers defaulting since S&P's most recent report included Novasep Holding SAS, NBC Acquisition Corp. and wholly owned subsidiary Nebraska Book Co Inc. and Real Mex Restaurants Inc.

The agency's baseline projection for the U.S. corporate speculative-grade default rate in the 12 months ending in June 2012 is 1.6%.

A total of 25 speculative-grade issuers would need to default from July to June 2012 to realize the mean baseline projection for an average of two defaults per month.

The agency said its pessimistic alternative default rate forecast projects a 4% rate, and the optimistic scenario would mean a 1.2% rate.

From July to June 2012, 62 issuers would have to default to reach the pessimistic default rate forecast, and 18 issuers would have to default to reach the optimistic forecast.

Weakest links increase

The agency said the number of global weakest links increased to 109 as of July 20 from 107 last month. The 109 weakest links have combined rated debt worth $184 billion.

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

Since its most recent report, S&P removed three entities from the list of weakest links and added five others.

Of those removed, S&P said FirstBank Puerto Rico and Centrais Eletricas do Para SA were taken off the list because of revisions to their CreditWatch or outlook status, and Peach Holdings Inc. was removed because S&P no longer rates the company.

Of the five new weakest links, Buffets Inc., Orchard Supply Hardware LLC and AMF Bowling Worldwide Inc. were added, because they were downgraded and their outlook statuses were revised. Hudson Products Holdings Inc. was added to the list after S&P revised its outlook to negative, and the ratings agency lowered the rating on ATI Acquisition Co. to CCC from B.

All five of the new weakest links are based in the United States.

Sector breakdown

Based on the number of weakest links, the agency said the media and entertainment, banks and oil and gas exploration and production sectors are most vulnerable to default.

S&P said the media and entertainment sector is the most vulnerable, with 27 weakest links, or 25% of the total, while banks had 10 entities, and oil and gas exploration and production had nine.

S&P said U.S.-based issuers account for almost 68% of weakest links, partially because a large proportion of S&P-rated issuers are in the United States.

By volume, the 74 U.S.-based weakest links account for $109 billion of debt, which is about 59% of the total $184 billion issued by all weakest links.

Leveraged loans

The 12-month-trailing default rate for U.S. leveraged loans was 1.51% in June, essentially flat from 1.5% in May, S&P said.

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