S&P reports 1.25% trailing 12-month April global corporate junk default rate

By Caroline Salls

Pittsburgh, May 10 - Standard & Poor's reported a rise in the trailing 12-month global corporate speculative grade bond default rate in April, with the rate increasing to 1.25% from 1.17% in March.

Two defaults were recorded in April among S&P rated companies, coming from Bally Total Fitness Holding Corp. and Remy International Inc., bringing the year-to-date total to eight defaults affecting rated debt worth $1.8 billion.

By region, S&P said the April speculative-grade default rates were 1.44% in the United States, 2.37% in Europe and 0.37% in the emerging markets.

S&P said the highest U.S. default rates recorded by industry in the trailing 12 months were in the forest and building products/homebuilders sector.

As of May 8, S&P said 101 weakest links were vulnerable to default on combined rated debt worth $70.9 billion, 10 fewer than in March.

S&P defines weakest-links as issuers rated B- or lower with either a negative outlook or ratings on CreditWatch negative.

S&P said consumer products, media and entertainment, and retail/restaurants showed the highest concentration of weakest-links issuers.

The proportion of high-yield distressed issuers was unchanged in April, remaining at the record low of 0.8%, as S&P reported that distress and defaults continue to be suppressed by abundant liquidity and generous financing provisions.

S&P said it forecasts that the U.S. speculative-grade default rate will continue increasing throughout the year, reaching 2.3% by year-end 2007 and 2.5% by the first quarter of 2008.

According to the report, as defaults inch higher, spreads should begin to increase as well, and a simple relationship between spreads and defaults suggests that S&P's default rate forecast of 2.3% by year-end 2007 would be associated with spreads of about 350 basis points to 375 bps, compared with 297 bps at the May 8 reading.

S&P said the combination of strong regional and global growth in recent years and the accommodative business environment resulted in scarce default occurrences.

By number of issuers, U.S. low-rated bond issuance as measured by deals rated B- or lower compared to total speculative-grade volume in the trailing six months increased to 48.7% in April from 44.4% in March.

By volume, the ratings agency said the proportion of U.S. low-rated bond issuance to total junk increased to 38.2% in April from 35.7% in March.

The U.S. leveraged loan market ended April default free again, according to S&P, the fifth consecutive month without a default.

This drove the lagging 12-month default rate to a new 0.44% low in April, down slightly from 0.45% in March.

S&P said default rates are being suppressed by strong earnings among institutional issuers and continued liquidity, which has enabled issuers to refinance or amend deals rather than face bankruptcy.

Although defaults in the next 12 months are expected to remain below average in this segment, over the long term S&P expects the increasingly aggressive structures of the new-issue market to leave many issuers vulnerable to default when liquidity dries up.

Weakest links details

Since the last report, S&P said 13 entities were removed from the weakest-links list, while three were added.

With 15 issuers, S&P said the consumer products sector showed the highest vulnerability to default among the weakest links, constituting 14.9% of issuers.

Next, were the media and entertainment and retail/restaurants sectors, with 14 and 13 issuers, respectively, each and constituting 13.9% and 12.9% of the total.

Three sovereigns, the Republic of Bolivia, Republic of Ecuador, and Republic of Lebanon, were on the list.

Geographically, S&P said U.S.-based issuers (including tax havens) featured disproportionately on the weakest-links list, accounting for 76% of the total entities, which resulted from the higher ratings penetration in the U.S. marketplace.

Meanwhile, the industrial sector continues to be the leading issuer of low-rated issues through April, with deals worth $15.3 billion, following the trend established in 2006, S&P reported.

Within industrials, homebuilders and real estate companies, media and entertainment, retail/restaurants, aerospace and defense, forest products and building materials and high technology sectors took the lead, with each sector issuing more than $1 billion in low-grade issuance in the year to date.

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