S&P expects U.S. junk default rate to increase to 2.3% by March 2015

By Caroline Salls

Pittsburgh, May 6 - Standard & Poor's expects the U.S. corporate trailing-12-month speculative-grade default rate to increase to 2.3% by March 2015 from 1.6% in March 2014, according to an S&P report released Tuesday.

S&P said its baseline projection is well below the long-term 1981 to 2013 average of 4.4%.

A total of 40 speculative-grade-rated issuers would need to default from April 2014 through March 2015 to reach this projection. In comparison, S&P said 25 speculative-grade entities defaulted in the 12 months through March, and 34 defaulted in 2013.

The ratings agency said the accommodative Fed policy, along with continued improvement in economic conditions, is likely to help keep bond issuance healthy in the near term.

According to the report, corporate bond maturities appear manageable in 2014, and investors continue to allocate capital to sub-investment-grade debt.

S&P said more than $120 billion in speculative-grade debt is due to mature in 2014, and, given healthy bond issuance since last year and normal data reporting lags, the agency suspects that part of this sum has already been refinanced.

S&P said it is "mindful of the risk that the markets may turn disorderly during this period of unprecedented monetary policy transition and that other unexpected outside factors could impede the economic recovery."

Alternate scenarios

The agency said its optimistic default rate forecast assumes that U.S. real gross domestic product will be stronger, growing by 3.5% in 2014 and exceeding 4% in 2015. S&P said this growth will be fueled by a strong private sector and robust growth in consumer and business spending that stems from increased confidence. The increase in consumer spending would be supported by a faster improvement in the labor market, with the unemployment rate declining to 4.8% in 2015.

Under this optimistic scenario, S&P said it would expect the default rate to decline to about 1.5% through March 2015, requiring 26 defaults in the 12 months through March 2015.

On the other hand, S&P said its pessimistic scenario assumes that U.S. economic growth will be slower, with real GDP growing by just 1.2% in 2014 and 1.6% in 2015. The agency said the lower GDP growth reflects a worsening in global economic conditions, with China's growth decelerating faster and a stalled recovery in Europe.

S&P said a possible credit event in the nonbank financial sector of China would cause funding to dry up and hurt overall economic growth. A significant slowdown in China would have global repercussions, according to the report.

Under the pessimistic scenario, the default rate would be expected to rise to 4%, requiring 70 defaults in the 12 months through March 2015.

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