S&P junk default rate increases to 2.43% in June; weakest links down

By Caroline Salls

Pittsburgh, Aug. 20 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate increased to 2.43% in June from 2.29% in May, according to a report titled "Global Weakest Links And Default Rates: Weakest Links Count Continues To Decline."

Regionally, the U.S. corporate speculative-grade default rate increased to 2.55% for the 12 months ended in June from 2.5% in May, while the European speculative-grade default rate increased to 2.87% from 2.61%. The emerging markets speculative-grade default rate increased to 2.2% from 1.93%.

S&P said that 53 issuers defaulted through Aug. 9, including confidential entries. These defaulted issuers have outstanding debt worth $76.5 billion.

In comparison, 85 defaulted issuers had combined outstanding debt worth $86.7 billion in 2012.

The agency said 10 non-confidential entities defaulted since its most recent report, including Desarrolladora Homex SAB de CV, Maxcom Telecomunicaciones SAB de CV, Codere SA, Magyar Telecom BV, Excel Maritime Carriers Ltd., Cengage Learning Holdings II LP, Jacuzzi Brands Corp., Agroton Public Ltd., Rural/Metro Corp. and Banco Rural SA.

Weakest links decrease

According to the report, the number of global weakest links decreased by six issuers to 129 as of Aug. 9. The 129 weakest links have total rated debt worth $206.7 billion.

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

S&P said a total of nine of the weakest links removed from the list since its last report are from the United States, three are from Europe, two are from Latin America, and one each is from Asia-Pacific, Eastern Europe, the Middle East, and Africa (EEMEA) and Canada. Of the entities added this month, eight are from the United States, two are from Europe, and one is from Asia-Pacific.

The following issuers were removed from the list:

• Black Press Ltd., Casella Waste Systems Inc., Community Choice Financial Inc., Enterprise Networks Holdings BV, Expro Holdings U.K. 3 Ltd., Quicksilver Resources Inc., Quicksilver Inc. and Smile Brands Group Inc. were removed because their outlooks were revised to stable;

• Banco Rural, Cengage, Magyar and Maxcom were removed because they defaulted;

• Agroton and Rural/Metro were removed as a result of selective defaults;

• GFNZ Group Ltd. and Knowledge Universe Education LLC were removed because their CreditWatch status was revised to positive;

• Bonten Media Group Inc.'s rating was withdrawn; and

• Vertellus Specialties Inc. was removed after it was downgraded and its outlook revised to stable.

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

• Colt Defense LLC, New Enterprise Stone & Lime Co. Inc., RAAM Global Energy Co. and RGS Assets Ltd. were added when their outlooks were revised to negative;

• Affinion Group Holdings Inc., New World Resources NV, Sbarro LLC and IAP Worldwide Services Inc. were added after they were downgraded and their outlooks revised to negative; and

• Angas Securities Ltd., Sensus USA Inc. and Kemet Corp. were added after they were downgraded.

Sector breakdown

The agency said the media and entertainment, oil and gas exploration and bank sectors are most vulnerable to default.

S&P said the media and entertainment sector has the greatest number of weakest links, with 25 entities, or 19.4% of the total. Oil and gas exploration had the next highest number of weakest links, with 13 entities, 10.1% of the total, and the banks sector had 11 entities, or 8.5% of the total.

Default rate forecast

S&P said it expects the U.S. corporate trailing-12-month speculative-grade default rate to increase to 3.1% by June 2014 from 2.6% in June of this year.

A total of 52 speculative-grade issuers would need to default by June 2014 to reach this projection. In comparison, 40 speculative-grade entities defaulted in the 12 months ended in June.

The agency said its optimistic default rate forecast assumes that U.S. real GDP growth will be stronger, at 2.6% in 2013 and 4.9% in 2014, because of a stronger recovery in the housing sector and robust growth in consumer and business spending.

S&P said a faster improvement in the labor market, with the unemployment rate declining to less than 6% by third-quarter 2014, would support the growth in consumer spending.

Under this scenario, S&P said it would expect the default rate to decline slightly to about 2.3% through June 2014, requiring 39 defaults over the next 12 months.

On the other hand, the agency said its pessimistic scenario assumes that U.S. economic growth will slow further, with real GDP growing by just 1.5% in 2013 and 0.6% in 2014, reflecting a pullback in consumer spending as the unemployment rate rises back above 8% in 2014.

S&P said business confidence would deteriorate, weighing on equipment spending. The deeper downturns in Europe and China would also keep U.S. exports weak, equity markets would tumble and the housing recovery would falter.

As a result, S&P said investors could become very selective and available credit would be significantly constrained, particularly to entities with lower credit quality.

Under this pessimistic scenario, S&P said it expects the default rate to rise to 5.0%, requiring 85 defaults over 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, increased to 1.65% in July from 1.49% in June, S&P reported.

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