S&P reduces U.S. 12-month junk default rate projection to 6.9%

By Caroline Salls

Pittsburgh, Oct. 21 - Standard & Poor's said it now projects that its U.S. corporate speculative-grade default rate will fall to 6.9% in the next 12 months, down from September's projected trailing 12-month rate of 10.8%, according to an S&P report.

S&P said its pessimistic and optimistic scenarios result in U.S. trailing 12-month default rates of 9.9% and 5.5%, respectively.

The ratings agency said it had previously stated expectations "for a swathe of defaults to occur in the first half of 2010."

But now, S&P said it expects that many of the defaults might be postponed to later quarters beyond the 12-month forecast horizon.

As a result of lenders' willingness, S&P said a number of distressed issuers have simply been able to postpone default in the near term by using strategies that include bond-for-loan takeouts, loan extensions, covenant amendments or resets and equity issues.

S&P said some other issuers have sought to avoid Chapter 11 by implementing buybacks below par or other forms of distressed exchanges.

In addition, S&P said issuers who engaged in distressed exchanges "are hardly out of the woods."

Of the 72 U.S.-based issuers that underwent recent distressed exchanges, the agency said many remain highly vulnerable based on low credit ratings and outlooks.

Since its most recent update, S&P said the tone in the capital markets has improved measurably, resulting in benefits for even low-rated borrowers.

S&P said its revised projection does not mean that corporate default risks are permanently lower, but that improvements are "largely being driven by increased forbearance by lenders in a monetary environment propped up by policy-induced liquidity."

"Without a revival in top-line earnings and growth, many of the surviving leveraged issuers originated during 2003-2007 could face renewed default risk unless they significantly reduce their debt burdens," S&P said.

In addition, the ratings agency said: "The projected drop in the corporate default rate conveys a greater sense of foreboding than it does genuine relief."

However, S&P did say that "financial conditions are clearly on the mend."

"Interest rates have normalized and investor appetite for risk appears rejuvenated," S&P added.

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