S&P global default rate falls to 2.44% in January; weakest links up

By Caroline Salls

Pittsburgh, Feb. 16 - Standard & Poor's 12-month-trailing global corporate speculative-grade default rate fell to 2.44% in January from 2.76% in December, marking its 12th consecutive monthly decline, according to a report entitled "Global Weakest Links And Default Rates: Weakest Links Increase Modestly As The Global Default Rate Continues To Fall."

Regionally, the U.S. speculative-grade corporate default rate decreased for the 14th month in a row to 2.68% in January from 3.2% in December. In Europe, the default rate rose to 1.52% from 1.02% in December, and the emerging markets default rate increased modestly to 1.40% in January from 1.23% in December.

S&P said only two issuers have defaulted through Feb 14, including U.S.- based Sbarro Inc. on Feb. 1 and Czech Republic-based Sazka AS on Jan. 13. Together, these two issuers have affected debt worth $540 million. The ratings agency said 82 issuers defaulted in 2010, affecting debt worth $97.48 billion.

Default rate projection

S&P's baseline projection for the U.S. corporate speculative-grade default rate in the 12 months ending in 2011 is 1.8%.

A total of 27 speculative-grade-rated issuers would need to default from January to December 2011 to realize the mean baseline projection for an average of 2.25 defaults per month.

The agency said its pessimistic alternative default rate forecast projects a 3.5% rate, while the optimistic scenario would mean a 1.3% rate.

From January to December 2011, 52 issuers would have to default to reach the pessimistic default rate forecast, and 19 issuers would have to default to reach the optimistic forecast.

Weakest links down

The ratings agency said the number of global weakest links increased to 111 as of Feb. 10 from 107 in December and 213 in February 2010. The 111 weakest links have combined rated debt worth $147.68 billion.

Weakest links are issuers rated B- and lower with a negative outlook or ratings on CreditWatch negative.

Since its most recent report, S&P removed two entities from the list of weakest links and added six others.

Of those removed, Sbarro Inc. was removed because it defaulted, and Primus Telecommunications Group Inc. was removed because it now has a stable outlook.

Of the six new weakest links, two were added because they were downgraded and now have negative outlooks, and two were added because of revisions to their CreditWatch/outlook status to negative. The other two are newly rated entities.

S&P said four of the six additions are U.S.-based issuers, and one each is based in the United Kingdom and Ireland.

Sector breakdown

Based on the number of weakest links, the ratings agency said the media and entertainment; oil and gas exploration and production; and chemicals, packaging and environmental services sectors have typically been the most vulnerable to default.

S&P said the media and entertainment sector is the most vulnerable, with 26 weakest links or 23.4% of the total, while oil and gas exploration and production had 12 entities and chemicals, packaging and environmental services had eight.

S&P said U.S.-based issuers account for 68.5% of weakest links, partially because a large proportion of S&P-rated issuers are in the United States.

By volume, the 76 U.S.-based weakest links account for $112.30 billion of debt, which is almost 76% of the total $147.68 billion issued by all weakest links.

Leveraged loans

The 12-month-trailing default rate for U.S. leveraged loans continued its decline, falling to 2.18% in January from 2.86% in December.

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