S&P global speculative-grade default rate increases to 2.56% in July

By Caroline Salls

Pittsburgh, Aug. 30 - Standard & Poor's 12-month trailing global corporate speculative-grade default rate climbed to 2.56% in July from 2.5% in June, according to a report titled "Global Weakest Links And Default Rates: Weakest Links Count Remains Flat At 128."

Regionally, the U.S. corporate speculative-grade default rate increased to 2.82% in July from 2.7%, while the European speculative-grade default rate fell slightly to 2.42% from 2.44%. The emerging markets speculative-grade default rate increased to 1.97% in July from 1.85% in June.

S&P said 54 issuers have defaulted through Aug. 22, including confidential entries. These defaulted issuers have outstanding debt worth $58.7 billion.

In comparison, S&P said 53 defaulted issuers had combined outstanding debt worth $87.7 billion in 2011.

The agency said six entities have defaulted since its most recent report, including National Service Industries Inc., BTA Bank JSC, Aventine Renewable Energy Holdings Inc., Nobina AB, ATP Oil & Gas Corp. and LifeCare Holdings Inc.

Weakest links unchanged

According to the report, the number of global weakest links remained unchanged at 128 as of Aug. 22. The 128 weakest links have total rated debt worth $237 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 nine entities from the weakest links list and added nine others.

Six of the nine entities removed from the list were from United States, two were from Europe, and one entity was from Asia-Pacific. Of the nine new weakest links added, eight entities are from the United States, which includes Bermuda and the Cayman Islands, and he remaining entity is from Europe.

The following entities were removed from the list:

• Medical Card System Inc. was removed after S&P placed the rating on CreditWatch developing;

• RAAM Global Energy Co. and Sears Holdings Corp. were removed after S&P revised the rating outlooks to stable;

• Aventine Renewable Energy Holdings Inc. and Nobina AB were removed after S&P lowered the ratings on the companies to SD;

• Hovnanian Enterprises Inc. was removed after S&P revised the rating outlook to positive.

• LifeCare Holdings Inc. was removed after the agency lowered the rating on the company to D; and

• Broadlands Finance Ltd. and Rede Ferroviaria Nacional REFER E.P.E. were removed after S&P withdrew the ratings on both companies.

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

• Caesars Entertainment Corp., iQor Holdings Inc., Simmons Foods Inc. and DAE Aviation Holdings Inc. were added after S&P revised the outlooks to negative;

• LodgeNet Interactive Corp. was added after S&P downgraded the entity to CCC and assigned a negative rating outlook;

• GMX Resources Inc. was added after the ratings agency downgraded the entity to CC and assigned a negative rating outlook;

• RadioShack Corp. was added after S&P downgraded the entity to B- from B+;

• Comboios de Portugal E.P.E. was added after S&P removed a related entity, Rede Ferroviaria Nacional REFER E.P.E., from the list after withdrawing its rating; and

• Rotech Healthcare Inc. was added after S&P downgraded the company to CCC- and assigned a negative rating outlook.

S&P said the United States has the highest number of weakest links with 78, or 60.9% of the global total. By volume, the 78 U.S.-based weakest links account for about $170.3 billion of debt, which represents 71.7% of the total of $237 billion for all weakest links.

Sector breakdown

By sector, the media and entertainment, forest products and building materials and metals, mining and steel sectors have the greatest concentrations of weakest links.

S&P said the media and entertainment sector has the greatest number of weakest links, with 35 entities, 27.3% of the total. The forest products and building materials follows, with 10 entities, or 7.8%, while the metals, mining and steel sector has nine entities, or 7%.

Default rate forecast

S&P said its baseline forecast, with a 60% probability, is for a 12-month-forward speculative-grade default rate of 3.7% in the United States.

To realize the baseline projection, a total of 57 speculative-grade-rated issuers would need to default during the 12 months ending in June 2013, for an average of 4.8 defaults per month. S&P said this is higher than the average of 3.4 defaults per month during the last 12 months.

The agency said its optimistic default rate forecast assumes a much improved U.S. economy, buoyed by a faster rebound in the housing sector, an improving labor market that spurs consumer spending and a stronger global economy, including a speedier resolution of the sovereign crisis in Europe.

As a result, S&P said it would expect the default rate to decline to 2.2% by June 2013, or 34 defaults during the next 12 months, from the June 2012 default rate of 2.7%.

On the other hand, S&P said its pessimistic scenario assumes a protracted and deeper sovereign crisis in Europe, resulting in loss of investor confidence and the United States experiencing another recession in the second half of 2012.

In addition, the agent said U.S. lawmakers face political gridlock on budget deficit issues before and after the presidential election in November, which in turn, further erodes consumer confidence and restrains consumer spending.

Under this pessimistic case, S&P said it expects the default rate to rise to 5.5%, or 85 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, fell slightly to 1.06% in July from 1.08% in June, S&P reported.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.