S&P: Global speculative-grade default rate down to 2.5% in November

By Caroline Salls

Pittsburgh, Dec. 28 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate fell slightly to 2.5% in November from 2.57% in October, according to a report titled "Global Weakest Links And Default Rates: The Weakest Links Count Increases To 158."

Regionally, the U.S. corporate speculative-grade default rate also declined to 2.69% for the 12 months ended in November from 2.75% in October, while the European speculative-grade default rate contracted to 1.95% from 2.3%. The emerging markets speculative-grade default rate widened slightly to 2.37% from 2.36%.

S&P said 82 issuers have defaulted through Dec. 17, including confidential entries. These defaulted issuers have outstanding debt worth $116.9 billion.

In comparison, S&P said 53 defaulted issuers had combined outstanding debt worth $87.7 billion in 2011.

The agency said six non-confidential entities defaulted since its most recent report, including NewEnergy Inc., IAP Worldwide Services Inc., Energy Future Holdings Corp., Companhia de Energia Eletrica do Estado do Tocantins (Celtins), Midwest Generation LLC and Edison Mission Energy.

Weakest links increase

According to the report, the number of global weakest links increased to 158 as of Dec. 17 from 145 as of Nov. 19. The 158 weakest links have total rated debt worth $245.4 billion.

Weakest links are issuers rated B- and lower with either negative outlooks or ratings on CreditWatch with negative implications.

Since its most recent report, S&P said it removed 10 entities from the weakest links list and added 23 others.

Six of the weakest links removed from the list are from the United States, and one each is from Europe, Latin America, Canada and Eastern Europe and the Middle East and Africa.

The following entities were removed from the list:

• Texas Industries Inc., inVentiv Health Inc. and Federal Bank for Innovation and Development were removed after S&P revised the rating outlooks on the companies to stable;

• Shingle Springs Tribal Gaming Authority was removed after S&P revised the rating outlook on the company to developing;

• CMA CGM SA was removed after the agency placed the rating on the company on CreditWatch positive;

• Companhia de Energia Eletrica do Estado do Tocantins and Energy Future Holdings Corp. were removed after S&P lowered the ratings on the companies to SD;

• Edison Mission Marketing & Trading Inc. was removed after S&P lowered the rating on the company to D;

• NextMedia Operating Inc. was removed after S&P withdrew the ratings on the company; and

• Perpetual Energy Inc. was removed after the ratings agency downgraded the company to CCC+ and assigned a developing rating outlook.

Meanwhile, S&P added the following entities to the list:

• Builders FirstSource Inc., Quicksilver Resources Inc., Spanish Broadcasting System Inc., Community Choice Financial and Trident Resources Corp. were added after S&P revised the rating outlooks on the companies to negative;

• Phoenix Cos. Inc. was added after S&P placed the rating on the company on CreditWatch negative;

• Airvana Network Solutions Inc. was added after S&P downgraded the company to CCC- and assigned a negative rating outlook;

• Hibu plc was added after S&P upgraded the entity to CC and assigned a negative rating outlook;

• The New Reclamation Group Pty Ltd. was added after the agency upgraded the entity to CCC- and assigned a negative rating outlook;

• Central European Media Enterprises Ltd. and Nelson Education Ltd. were added after S&P downgraded the entities to CCC+ and assigned a negative rating outlook;

• Norske Skogindustrier ASA was added after S&P downgraded the entity to CCC+ and placed the rating on CreditWatch negative;

• Connacher Oil and Gas Ltd., Banco Rural SA, FTS International Services LLC, Education Management LLC, Schmolz + Bickenbach AG and Songa Offshore SE were added after S&P lowered the ratings on the companies to B- from B;

• Smile Brands Group Inc. was added after S&P lowered the ratings on the company to B- from B and assigned a negative rating outlook;

• Energy Future Intermediate Holding Co. LLC, Texas Competitive Electric Holdings Co. LLC and Energy Future Competitive Holdings Co. were added after S&P downgraded the parent company, Energy Future Holdings Corp., to SD; and

• LBI Media Inc. was added after S&P upgraded the company to CC and assigned a negative rating outlook.

Sector breakdown

By sector, the media and entertainment sector is most vulnerable to default.

S&P said the media and entertainment sector has the greatest number of weakest links, with 41 entities, 25.9% of the total. Oil and gas exploration had the next highest number of weakest links, with 12 entities, 7.6% of the total, and the metal, mining, and steel and the bank sectors had 11 entities each, or 7% of the total.

Default rate forecast

S&P said its baseline forecast is for a 12-month-forward speculative-grade default rate of 3.7% in the United States.

To realize the baseline projection, a total of 58 speculative-grade-rated issuers would need to default during the 12 months ending in September 2013.

The agency said its optimistic default rate forecast assumes a much-improved U.S. economy, buoyed by U.S. lawmakers agreeing on a sound deficit-reduction plan, a faster-than-expected improvement in the labor market, which would spur consumer spending, and stronger growth abroad.

As a result, S&P said it would expect the default rate to decline to 2.5% by September 2013, or 39 defaults during the next 12 months.

On the other hand, S&P said its pessimistic scenario assumes that the United States reverts back into recession in the next few quarters, succumbing to the threat of the fiscal cliff as U.S. lawmakers face political gridlock.

Under this pessimistic case, S&P said it expects the default rate to rise to 5.7%, or 90 defaults during the next 12 months.

Leveraged loans

The 12-month-trailing default rate for U.S. leveraged loans, which is based on the number of loans, expanded to 1.36% in November from 1.21% in October, S&P reported.

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