S&P reports record low 1% August global corporate junk default rate

By Caroline Salls

Pittsburgh, Sept. 15 - Standard & Poor's reported a record low 1.00% global corporate speculative-grade bond default rate for the 12 months ended in August, falling from 1.03% in July, according to a report released Friday.

S&P said the global default rate has been below its 1981 to 2005 long-term average of 4.61% for 31 consecutive months.

By region, S&P said trailing 12-month August speculative-grade default rates were recorded at 1.44% in the United States, 0.53% in Europe and zero in the emerging markets.

According to the report, the number of weakest links climbed to its highest level in 20 months, and as of Sept. 13, 25 weakest links remained vulnerable to default on combined rated debt worth $10.2 billion. S&P said this is five greater than reported last month.

From January through August, 16 defaults, two more than reported a month earlier, were recorded in total among S&P-rated entities, affecting rated debt worth $5.8 billion.

In August, the two new defaults recorded were New Zealand-based Linsa Insurance Ltd. and U.S.-based Atlantic Mutual Insurance Co.

Despite the August decline, S&P said its prediction remains that the default rate will edge up slowly from its 2006 trough, as results from a proprietary forecast model indicate that U.S. speculative-grade bond default rates will continue to slowly edge up in the next few quarters, reaching 2.1% by year-end, roughly on par with year-end 2005.

S&P said the U.S. speculative-grade default rate is expected to breach 3.5% by the first quarter of 2008, well below the 47% long-term average.

Looking ahead, S&P said default rates among U.S. leveraged loans are also expected to increase.

In addition, the ratings agency said the new issue market among deals rated B- or lower is still fairly active, spiking to 56% in the United States at the end of August from 42% in the second quarter and 36% in the first.

S&P said the industrials sector took the lead, with capital goods, health care and high technology each issuing more than $1 billion in the year to date in low-rated issuance; and issuance by utilities was also sizable.

As defaults inch higher, S&P said spreads should begin to increase as well, as a simple link between default rates and speculative-grade spreads suggests that if the default rate climbs as expected, then speculative-grade spreads should be hovering at about 400 basis points to 425 bps by the first half of 2007 compared with 382 bps at the end of August.

Lending conditions easing

S&P said the decline in the speculative-grade default rate has been accompanied by a visible easing of lending conditions, especially in the United States, as reported in the Federal Reserve Loan Officer Opinion Survey on Bank Lending Practices.

In the latest survey, conducted in August, a 9% smaller net percentage of domestic banks reported easing standards for large and midsize firms - down from 12% in the April survey.

Among small firms, the net percentage of banks reporting easing standards for small firms declined to 1.8% from 7% in April.

Furthermore, S&P said the proportion of distressed credits in the U.S. - defined as speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 bps - declined to 3.1% in August from 3.2% in July.

Weakness was concentrated in the telecommunications and automotive sectors, which together constitute 45% of the total number of distressed issues.

S&P said default rates in the U.S. leveraged loan market have remained at 1.36% in August - same as last month and its lowest level since September 2005 - as reported by S&P's Leveraged Commentary and Data.

Weakest plans

In weakest links news, since July, Linsa Insurance Ltd. was removed from the list because it was placed under regulatory supervision, and Avondale Mills Inc. was removed because it is no longer rated. New names included U.S.-based issuers Merisant Worldwide Inc., National Coal Corp., Progressive Gaming International Corp., Viskase Cos. Inc. and Wise Metals Group LLC. Germany's Schefenacker AG was a new addition.

With four issuers each, S&P said the automotive, forest products and building materials and media and entertainment sectors showed the highest vulnerability to default among the weakest links, constituting 16% of the issuers on the most recent list.

Next in line was the consumer products sector with three issuers, constituting 12% of the total.

Geographically, U.S.-based issuers accounted for 21 of 25 issuers. Bermuda, Belize, Canada and Germany have one weakest link each.

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