S&P expects U.S. junk default rate to rise to 3.3% by December 2012

By Caroline Salls

Pittsburgh, Feb. 2 - Standard & Poor's said it expects the U.S. corporate trailing 12-month speculative-grade default rate to rise to 3.3% by December 2012 from 1.98% as of December 2011, according to a report titled "U.S. Corporate Default Rate Forecasted To Rise To 3.3% In 2012."

S&P said its baseline projection is still lower than the long-term 1981 to 2011 average rate of 4.5%.

A total of 51 issuers would need to default in the 12 months ending December 2012 to reach this projection, S&P said.

The ratings agency said its optimistic default rate forecast assumes that the U.S. economy and financial markets perform better than expected, resulting in a 1.8% default rate by December 2012. A total of 28 defaults would be necessary during the next 12 months to meet the optimistic forecast.

On the other hand, S&P said a financial collapse and a deep recession in Europe could lead to another recession in the United States.

Under this pessimistic scenario, the agency said it would expect the default rate to be 5.3%, or 81 defaults during the next 12 months.

According to the report, the increased momentum of the U.S. economic recovery has reduced the risk of another recession.

S&P said the labor market is improving, businesses appear to have more confidence, which have lead to greater investment and increased hiring, and consumers are spending a little bit more.

However, the agency said this stronger showing of the economy as of late may not be a reliable indicator of a strong economy for the remainder of the year, as strong headwinds remain. and volatility continues to characterize the recovery.

"While the risk of another recession has been reduced, it is still very much possible, predominantly due to Europe's still unresolved financial issues," S&P said in the report.

"Moreover, the markets remain concerned about increased regulation in the U.S. and how it would play out, the still excessive housing supply, and the government's austerity measures, which may impede the recovery."

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