S&P global speculative-grade default rate declines to 2.26% in March

By Caroline Salls

Pittsburgh, April 30 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate declined to 2.26% in March from 2.33% in February, according to a report titled "Global Weakest Links And Default Rates: Eight Of The Top CLO Holdings Are Weakest Links."

Regionally, the U.S. corporate speculative-grade default rate increased to 2.46% for the 12 months ended in March from 2.32% in February, while the European speculative-grade default rate decreased to 2.38% from 2.43%. The emerging markets speculative-grade default rate declined to 2.11% from 2.38%.

S&P said 29 issuers defaulted through April 24, including confidential entries. These defaulted issuers have outstanding debt worth $65.7 billion.

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

The agency said four non-confidential entities defaulted since its most recent report, including Geokinetics Inc., CEVA Group plc, Travelport Holdings Ltd. and Urbi Desarrollos Urbanos SAB de CV.

Weakest links increase

According to the report, the number of global weakest links increased by one issuer to 146 as of April 24. The 146 weakest links have total rated debt worth $232.1 billion.

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

Since its most recent report, S&P said it removed 10 entities from the weakest links list and added 11 others.

A total of six of the weakest links removed from the list are from the United States, two are from Canada and the remaining two are from Latin America and Europe. Of the entities added this month, three each were from the United States, Europe and Latin America, and one each was from Asia-Pacific and Eastern Europe, the Middle East, and Africa.

The following entities were removed from the list:

• New Enterprise Stone & Lime Co. Inc. was removed after its rating was upgraded and outlook revised to developing;

• Urbi Desarrollos was removed after it defaulted;

• MTR Gaming Group Inc., Air Canada, Ozburn-Hessey Holding Co. LLC, Millar Western Forest Products Ltd., Aspect Software Inc. and Associated Materials LLC were removed after their outlooks were revised to stable; and

• MediMedia USA Inc. and Plaza Centers NV's ratings were withdrawn.

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

• Artel LLC, Banco Financiero y Ahorros SA, Grupo Fertinal, SA de CV, OGX Petroleo e Gas Participacoes SA, JHCI Acquisition Inc. and Oberthur Technologies Holding SAS were added after they were downgraded and their outlooks were revised to negative;

• Corporacion GEO SAB de CV and Agroton Public Ltd. were added after they were downgraded and revised to CreditWatch negative;

• PT Bakrie Telecom Tbk. was added after it was revised to CreditWatch negative; and

• Yioula Glassworks SA was added after it was upgraded from selective default and its outlook was revised to negative.

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 30 entities, or 20.5% of the total. Oil and gas exploration had the next highest number of weakest links, with 14 entities, 9.6% of the total, and the banks sector had 12 entities, or 8.2% 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 3.4% by year-end 2013 from 2.6% as of December.

A total of 54 speculative-grade issuers would need to default in 2013 to reach this projection. By comparison, S&P said 39 speculative-grade entities defaulted in 2012.

The agency said its optimistic default rate forecast assumes faster U.S. economic growth, fueled by a stronger recovery in the housing sector and robust growth in consumer and business spending.

Under this scenario, S&P said it also expects a faster-than-expected improvement in the labor market.

S&P said the default rate would decline to 2.3% in 2013 under the optimistic scenario, or 37 defaults during the next 12 months.

On the other hand, S&P said its pessimistic scenario assumes that the United States reverts back into a recession, with the economy contracting 0.5% in 2013. The agency said the U.S. recession would result from financial contagion from the eurozone, where the recession is longer and deeper than expected in 2013.

According to the report, a significant economic slowdown in the emerging markets as well as the uncertainty related to the U.S. debt ceiling and budget negotiations would also have a direct impact on U.S. growth.

Under this pessimistic scenario, S&P said it expects the default rate to rise to 5.5%, or 88 defaults during 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 1.83% in March from 1.52% in February, S&P reported.

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