S&P says global junk default rate up to 1.68% in May

By Caroline Salls

Pittsburgh, June 6 - Standard & Poor's said the global corporate speculative-grade bond default rate ticked up to 1.68% at the end of May from its eight-year low of 1.52% in March, according to its weakest link and monthly default rates report.

The global speculative-grade default rate has remained below the long-term average of 4.91% for 18 consecutive months but is still higher than the record low of 1.27% posted in the second quarter of 1997.

Expectations for economic stability, relatively favorable financing conditions and healthy corporate profitability imply a sanguine outlook for defaults in the near term, according to S&P, with the global default rate edging up slowly from its trough before the end of 2005.

In the United States, S&P said results from a proprietary default forecast model indicate that U.S. speculative-grade default rates will decline slightly from their 2.0% first-quarter low but then turn around in the final quarter of 2005.

S&P's "weakest link" list of issuers vulnerable to default include issuers that are rated CCC or lower and have a negative outlook or are on CreditWatch negative.

As of June 6, S&P said a total of 18 entities remained vulnerable to default on rated debt worth $4.3 billion, three fewer than a month earlier, and also lower than the average of 30 entities recorded over full-year 2004.

S&P said a rising proportion of lower-grade issuance (B- or lower) beginning in 2003 serves as an early warning of renewed default pressure within two years.

In the first five months of 2005, the proportion of lower-grade issuance in the United States remained high at 49% compared with 43% on average in 2004.

The distressed ratio was 7.47% at the end of May, outpacing its 7.0% average recorded in full-year 2004.

Weakness was centered in the transportation and telecommunications sectors, which together account for just less than 40% of the total number of distressed issues.

S&P said the movement in the distressed ratio is parallel to the movement in the speculative-grade default rate.

In the United States, the highest default rates by industry in the trailing 12 months were recorded in the broadly defined aerospace/automotive/capital goods/metals category.

In the first five months of 2005, 12 defaults were recorded affecting rated debt worth $6.1 billion, compared with a total of 49 defaults in 2004 affecting debt outstanding worth $16.2 billion.

With six issuers, the media and entertainment sector showed the highest vulnerability to default among the weakest links, accounting for 33% of issuers and 29% of volume on the most recent weakest links list.

Geographically, U.S.-based issuers (including tax havens) featured disproportionately on the weakest-links list, accounting for 15 of 18 issuers. S&P said this could be attributed to the higher ratings penetration in the U.S. marketplace.

In the United States, the share of new issues rated B- and lower as a proportion of total speculative-grade issuance was 49% in the first five months of 2005, higher than the 43% and 31% averages recorded in full-years 2004 and 2003 respectively.

Within the lowest-rated segments, issues rated CCC+ showed the fastest growth in 2004.

In the first five months of 2005, the share of issues rated B- or lower to total speculative-grade issuance was especially high in the broadly defined industrial sector.

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