S&P: June global junk default rate up to 1.13%

By Caroline Salls

Pittsburgh, July 11 - Standard & Poor's said the global corporate speculative-grade bond default rate increased to 1.13% for the 12 months ended in June from 1.09% for both May and June, remaining near all-time lows, according to a report released Tuesday.

Speculative-grade default rates were recorded at 1.72% in the United States, up from 1.66% in May, 0.54% in Europe, down slightly from 0.55% the month before, and held steady at zero in the emerging markets.

From January through June, 12 defaults were recorded among S&P-rated entities, affecting $5.5 billion in rated debt.

Globally, the speculative-grade default rate has remained below the long-term (1981-2005) average of 4.66% for 29 consecutive months, S&P said.

S&P said results from a proprietary default forecast model indicate that U.S. speculative-grade default rates will continue to slowly edge up in the next few quarters, reaching 2.5% by year-end 2006 and 3.6% four quarters ahead.

The ratings agency said it expects the U.S. speculative-grade default rate to reach 4.0% by the second quarter of 2008, just below the long-term average of 4.7%.

Weakest links

As of Tuesday, a total of 19 weakest links remained vulnerable to default on rated debt worth $7.1 billion, the number same as a month earlier but one fewer than the average of 20 entities recorded over full-year 2005.

S&P said U.S.-based issuers (including tax havens) constituted 16 of the 19 issuers.

In June, two new defaults were recorded, one by Granite Broadcasting Corp. and the other by PCA LLC.

With four issuers, S&P said the forest products and building materials showed the highest vulnerability to default among the weakest links, constituting 21.1% of the issuers on the most recent weakest links list.

The media and entertainment sector and consumer products had three issuers each, constituting 15.8% each of the issuers. Next in line were automotive and chemicals, packaging and environmental services, with two issuers each.

Geographically, besides the 16 U.S.-based weakest links, Canada, Latin America (Belize) and New Zealand have one weakest link each.

Lower-rated issues increase

In addition, S&P said the pipeline in the lowest rungs of the ratings spectrum remains active, with the proportion of speculative-grade rated issues rated B- or lower rising to 42.9% in the United States at the end of the second quarter from 35.9% in the first quarter.

The corresponding proportions for Europe were 27.8% and 40.0%, respectively.

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 468 basis points by the end of June 2007, compared with 350 bps seen at the end of June 2006.

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 April, a greater net percentage of 12% of domestic banks reported easing standards for large and midsize firms - up from 11% in the January 2006 survey.

Furthermore, S&P said the proportion of distressed credits in the United States, defined as speculative-grade-rated issues that have option-adjusted spreads of more than 1,000 bps - first declined in 2003 and appears to have bottomed out in 2005.

The distress ratio was 3.7% at the end of June, which is less than the 6.2% average for full-year 2005.

S&P said weakness was concentrated in the telecommunications, automotive, and forest products/building materials sectors, which together constitute 55% of the total number of distressed issues.

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