S&P October global junk default rate climbs to 0.98%

By Caroline Salls

Pittsburgh, Nov. 10 - Standard & Poor's 12-month trailing global corporate speculative-grade bond default rate increased to 0.98% in October from a 24-year record low of 0.94% in September, according to a Friday report.

The global junk default rate has been below its long-term 1981 to 2005 average of 4.61% for 33 consecutive months, S&P said.

For the 12 months ended in October, the speculative-grade default rate was 1.27% in the United States, 1.08% in Europe and 0.20% in the emerging markets.

S&P said four defaults were recorded in October, the single largest monthly count in 10 months, bringing the year-to-date total to 22 defaults affecting rated debt worth $6.3 billion.

As of Nov. 7, the ratings agency said 24 weakest links remained vulnerable to default on combined rated debt worth $9.3 billion, the same number as in September. This figure is higher than the year-to-date average of 20, as well as the averages for full years 2005 and 2004, with 20 and 31 entities, respectively.

S&P predicted that the U.S. speculative grade default rate will end 2006 at a near-record low of 1.4%, will edge up slowly from its 2006 trough to 2.4% by the middle of 2007 and will end 2007 at 3.2%.

The agency said default rates among U.S. leveraged loans are also expected to increase.

Overall, S&P expects the U.S. speculative-grade default rate to remain below the 4.7% long-term average.

According to the report, the new issue market among deals rated B- or lower increased to 46% of total speculative grade in the United States at the end of October, partially because of lower overall issuance.

On a quarterly basis, S&P said the same ratio was 46% through the third quarter, 42% in the second quarter and 38% in the first.

The industrials sector took the lead, according to S&P, with high technology, capital goods, health care and media and entertainment each issuing more than $1 billion in the year to date in low-rated issuance.

Low-rated issuance in utility and telecommunications was also reported as sizable, with cumulative issuance of $4.5 billion and $3.3 billion, respectively.

Lending conditions easing

S&P said 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 Global Bond Markets' Weakest Links & Monthly Default Rates Opinion Survey on Bank Lending Practices.

In an October survey, domestic banks reporting neither eased nor tightened standards for large and midsize firms, the first neutral reading after continued easing since 2004, according to the agency.

Among small firms, however, banks continued easing standards in the October survey since the fourth quarter of 2003, although the net percentage of banks easing standards has shrunk to 1.8% in October from a peak of over 24% in the April 2005 survey.

S&P said institutions that reported easing of lending standards in the October survey cited more aggressive competition from other banks or non-bank lenders as an important factor in their decision.

The U.S. leveraged loan market declined further to 0.99% in October from 1.18% in September, sinking to the lowest level since August 2004, as reported by Standard & Poor's Leveraged Commentary and Data.

Four defaults in October

In October, four new defaults were recorded, including Dura Automotive Systems Inc., Sea Containers Ltd., Damovo Group SA and one confidentially rated company.

Since S&P's September report, three entities were removed from the list of weakest links: Dura Automotive Systems and Sea Containers because they defaulted and Pacific Lumber Co. because its outlook was changed to developing from negative, even as its corporate credit rating was upgraded to CCC from CCC.

Added to the list were Resorts International Hotel and Casino Inc., Wolverine Tube Inc. and Luxfer Holdings plc.

With five issuers, the media and entertainment sector showed the highest vulnerability to default among the weakest links, constituting 20.8 % of the issuers on the most recent list.

Next in line were automotive, forest products and building materials and consumer products, with three issuers each, constituting 12.5 % of the total.

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